made the right move , page-4

Steel support for WA magnetite
By Richard Roberts, 7 July 2008

Sino Iron Project drill core.
ESCALATING costs are shining an even brighter light on the economics of proposed major magnetite iron ore projects in Western Australia, though proponents are claiming that there is no shortage of potential backers if first-choice partners retreat from the front line.
Grange Resources chairman Anthony Bohnenn told HighGrade in Perth he was confident of securing financial support for the company’s proposed $US1.2 billion Southdown project “within two-to-three months”.
“It will be sooner rather than later,” he said.
The financial backing is not expected to come from existing Southdown joint venture partner, Japan’s Sojitz Corporation, with Bohnenn reiterating that Grange was in discussion with a “second partner”.
“What I can say is that there is a company looking fairly seriously at us,” he said. “I think it is likely to happen, but there are five other parties and really the biggest names [steel producers] are also doing due diligence now. Steel makers are now going vertically into the industry to ensure they have security of supply. Compared to even one year ago things have changed quite dramatically ... and we are seeing names now coming to us that weren’t there before.”
Grange reported last week that it had been advised by the WA Environmental Protection Authority (EPA) that it had recommended approval of the Southdown mine, 100km slurry pipeline to Albany and Albany Port infrastructure, to the state environment minister, subject to conditions. Grange is targeting production of up to seven million tonnes per annum of high quality magnetite concentrate from 2012, and a similar volume of premium direct-reduced iron (DRI) pellets to be produced in Malaysia. The company expects the mine environmental approval process to be completed in the current quarter. It is also seeking environmental approval for a new berth at Albany Port.
Similarly large-scale magnetite projects in WA are proposed by Gindalbie Metals, which has already locked in China’s Ansteel as its equal joint venture partner and the Karara project’s financial backer; Australasian Resources, which has submitted its bankable feasibility study notice to Chinese-backed Shougang Corporation to elicit an offer to finance 100% of the proposed $A2.7 billion Balmoral South project; Atlas Iron, which has the big Ridley project near its Pardoo hematite ore development; and Cape Lambert Iron Ore, which is in the process of selling its namesake project in the Pilbara to China Metallurgical Group Corporation unit MCC Mining.
At least two other potential suitors have reportedly shown interest in Cape Lambert.
MCC is developing what is currently the flagship WA magnetite iron ore project at Cape Preston, with CITIC Pacific Mining, part of the Hong Kong-listed, China-backed CITIC Pacific.
CITIC has already confirmed a 40% increase in the original cost estimate for what is known as the Sino Iron Project, up from $US2.5 billion to $US3.5 billion, albeit with a 15% increase in planned production capacity.
Bohnenn believes such cost blow-outs are likely to be common for the proposed WA magnetite projects, however, he believes China’s appetite for iron ore and desire to secure its own supply outside of the Rio Tinto/BHP Billiton/Vale/Fortescue Metals Group oligopoly, and in the face of declining domestic production, will translate into persistent support for long-life projects in the stable, secure WA business environment. In the case of Southdown, it is also increasing Middle East and South-East Asian demand for high-quality DRI pellets.
Bohnenn’s magnetite-sector peers say that Chinese and other investors are taking a very long term view of WA’s less sheltered, large-scale iron ore resources – predominantly magnetite – with security of raw material supply the main underlying driver of what occasionally looks like a concerted and co-ordinated bid by China to lock up a generation or two of steel mill feedstock. At most times though, such synchronisation seems to be completely lacking. Either that or there is a bottomless pit of money to be thrown at the external quest to secure and develop resources.
China has in the past sourced about half of its iron ore supply domestically but rapid growth in its steel production, coupled with shrinking resources and ore grades, mean that it could double iron ore imports in the next six years. Neighbour India, which has benefited from its proximity to China and been able to increase supplies of relatively low-grade iron ore, is now under increasing pressure to curb exports as its domestic steel production climbs. If it matches China’s level of steel usage per capita – more than six times current levels - its steel production could rise three-fold to 150 million tonnes per annum and iron ore demand would mushroom to 250Mtpa.
“I see delays and especially – as we’re already seeing with CITIC Pacific – enormous blow-out of costs, which the Chinese won’t like. But it’s [Sino Iron] a prestige project,” Bohnenn said. “It’s also all about securing supply.
“We always said our production costs would be $US52/t. Now they might go to $US60/t. But the contract prices [in Asia] are now $US225/t FOB, so I’m not too concerned.
“Australasian announced a 50% increase in their [projected] operating costs. This is a trend that will continue.”
A spokesperson for CITIC Pacific Mining in Perth said the $US3.5 billion of capital for the Sino Iron Project had been approved and a 27.6Mtpa magnetite concentrate/pellet operation was being built. More than 30% of the mining fleet had been delivered to site and the balance was due by the second quarter of 2009. CITIC paid Clive Palmer’s Mineralogy $US215 million in 2006 for the right to mine one billion tonnes of magnetite at Balmoral Central and subsequently secured a second billion-tonne resource from Palmer. While the company originally planned to be producing 12Mtpa of magnetite products next year, the spokesperson said it was still finalising gas supply agreements and hadn’t yet let a contract to build a water desalination plant. The mining fleet was still arriving.
Asked about regulatory approval for a proposed pellet plant, she said: “We have received approval for a proposal which is compliant with the existing state agreement act, which allows us to build the 6Mtpa pellet plant and associated infrastructure, so that work is getting underway.”
The spokesperson confirmed the pellet plant and desalination plant were included in the revised $US3.5 billion capital cost estimate, but she couldn’t comment on the projected cost of individual items. A plan to expand production to up to 70Mtpa remained dependent on CITIC securing a further four billion tonnes of resources.
“The 27.6Mtpa is based on the 2Bt of ore that we’ve acquired mining rights to, and that if you like is our foundation project. At the moment that’s what we’re focused on delivering, but we do recognise we’ve got the rights to 4Bt of iron ore and there’s definitely expansion potential down the track,” she said.
CITIC’s commitment to WA’s biggest magnetite project has been underlined by its decision to spend about $US650 million on its own fleet of bulk carriers, to be delivered by 2012, “to ensure transportation from abroad to the group’s special steel businesses in [China] for supply of iron ore [and including] transportation of the group’s iron ore products from Western Australia”, it said earlier this year. The ships will also transport coal.
Australasian Resources, which has courted China’s fourth biggest steel producer Shougang for more than a year, has also received interest in Balmoral South from other parties. Managing director Andy Caruso was understandably coy about discussing Plan B, with Shougang having until the end of September to decide whether to provide an interest-free loan for the $US3 billion-plus project.
Australasian wants to develop an operation able to produce up to 24Mtpa of magnetite concentrate adjacent to CITIC’s Sino Iron Project but a project that size would require a water desalination plant and more power than the one the company outlined last month before sending its BFS off to Shougang. Australasian has had only preliminary discussions with CITIC about joint development and ownership of expensive infrastructure.
Caruso declined to comment when asked why CITIC itself wouldn’t make a stronger play for Balmoral South given it was already chasing more resources from Palmer and weighing up expansion. But he acknowledged that “entities in Hong Kong and elsewhere seem to retain strong links back to the Chinese Government, and you would think that in future we may see a more coordinated approach in the expending of some of those energies”.
“There seems to be allowance made for different Chinese groups to make decisions on their own and act independently,” he said. “It’s a fascinating landscape, it really is. In the space we sit in we don’t always appreciate all the machinations going on behind the scenes with the Chinese companies.”
In the meantime, Australasian was simply waiting for a finance offer from Shougang.
“Once we establish financing and put that in place we’re in a good position then to discuss further synergies with CITIC, including looking at power and water,” he said.
“We’ve got a strong working relationship with Shougang and they retain exclusivity on the project, so our primary aim is to secure funding through Shougang. They can present a finance offer if they wish to go ahead. They’re not compelled to. We have a view that additional third party interest is only a healthy thing for us.”
Atlas Iron managing director David Flanagan told HighGrade the company had fielded strong interest in Ridley from potential joint venture parties. A pre-feasibility study on a 25-year, 10Mtpa magnetite concentrate operation is in progress, while recent testwork has pointed to the potential for a high-value DRI grade product stream. Further tests are underway at China’s Maanshan Institute.
Flanagan said the DRI product was potentially a significant differentiator for Atlas Iron, though there was no shortage of interest in the project as a whole. As with Grange’s Southdown project, DRI-grade feed potential has caught the attention of Middle East investors.
“We’ve had 150 expressions of interest from groups wanting to talk about our magnetite with us, and probably four of those groups have been from the Middle East,” Flanagan said. “And two expressions of interest have come in very strong and hard in the last four months.
“Proportionately, to have half the expressions of interest from that part of the world come in as very strong expressions of interest is far greater than what we’ve seen out of China so far.”
Bohnenn said the DRI pellet market was “much tighter than the general iron ore market”. Analysis out of Europe indicated total DRI pellet seaborne trade in 2007 was around 27Mt, or 3.5% of world seaborne iron trade. This is being tipped to rise to 41Mt in 2010 (3.9% of seaborne trade) and 80Mt in 2015 (5.6%).
“There are only, at best, 4-5 producers of high-quality DRI pellets in the world,” Bohnenn said. “Most of them are in Brazil and there is one, LKAB, in Sweden. They produce excellent quality pellets, but 90% of the production remains in Europe and 10% goes to the Middle East.
“Given the strong investment in DRI steel production in the Middle East and South East Asia, there is expected to be twice as much demand in the next 5-10 years as there will be new production capacity coming on stream.”
Seemingly digging in for the long haul too is Ansteel, which is increasing its steel making capacity by more than 100% to 50Mtpa by 2011. Australian analysts on a recent visit to the Chinese company’s operations in northern China were most impressed with the apparent strength of Gindalbie Metals’ relationship with Ansteel as a key factor in the likely advance of Karara.
“Ansteel has been the largest iron ore miner in China, however, with grades in the order of 20-28% Fe its own sources of iron ore are expensive relative to Karara,” a report by CCZ Equities said.
“The [Gindalbie-Ansteel] relationship, coupled with Karara’s long life (of 40 years) in our opinion sets [Gindalbie] apart from all other iron ore emergers.
“Apart from ensuring the company will be able to sell all of its product when the iron ore market returns to surplus, this partnership could also underpin strong volume growth in the order of 80%-plus from initial production levels.”
Another impressed with what he saw during the Ansteel visit was Southern Cross Equities’ Charlie Aitken.
“While I have followed Gindalbie for a few years now, this trip to China has totally woken me up to how close the link to Ansteel actually is and how strong the partnership is. When you are sitting in a meeting and the big boss of the company [Ansteel’s president Dr Zhang Xiaogang] is saying that Gindalbie is vital to their long term growth plans in steel production it really does wake you up,” Aitken said.
“The fact that the four most senior Ansteel bosses were all at [a] dinner was a sign to me of how highly they regard the Karara project.
“Ansteel really stressed how they would love for Gindalbie to be producing right now as it would solve some of their supply problems, but they know environmental and other approvals take time in Australia.”