Premium iron ore demand opens door for mid-tier companies

Mining in Main Pit at Koolan Island. Image: Mount Gibson Iron.

An increase in global demand for high quality iron ore coupled with a supply shortage has some of Australia’s lesser known mining companies optimistic.

When you think about iron ore, the first companies that come to many minds are the giants of the industry like BHP, Rio Tinto and Fortescue Metals Group.

For years, the big guns have dominated the industry in Australia, churning out tonnes of iron ore to be shipped to steel mills across the globe.

That was until last year, when the demand for premium grade ore accelerated, giving opportunity to a raft of junior and mid-tier mining companies to capitalise on the vast market on offer.

This gap in the market occurred for a number of reasons, according to CRU global iron market analyst Andrew Gadd.

“Demand for high grade iron was exceptionally high in 2018, driven particularly by restrictions imposed on operations in the last two China winter heating seasons to control pollution, as well as strong steel demand,” he says.

The result of this combination of factors was that steel margins surged globally, as China reduced its steel exports.

One of the major benefits of premium ore is that it can be used to create pellets, which are typically used as raw material for blast furnaces.

In such an environment, mills were willing to pay higher premiums for high-grade ore to maximise blast furnace productivity – leading to pellet and lump premiums reaching record levels.

This demand outbalanced the global supply of high-grade ore and subsequently pellets due to interruptions stemming from Brazil.

“There were significant disruptions to seaborne high-grade supply last year, most notably Anglo’s Minas Rio in Brazil, while this year the pellet market is heavily impacted by the Vale Brumadinho tailings accident in Brazil,” Gadd says.

While the iron ore market remains volatile, high-grade ore producer Mount Gibson is emblematic of a mid-tier mining company that has pounced on a gap in the market.

The restart of production and sales from its Koolan Island mine in April is already paying dividends, after the site was closed down in 2014 due to extensive flood damage.

Its Main Pit consistently returns a high-grade iron ore product of 65.5 per cent iron, capable of delivering significant profits for the company.

S&P Global Platts, which provides commodities benchmark price assessments, reported that iron of 62 per cent Fe sells for $US93 ($133) per tonne, 65 per cent Fe for $108 per tonne and 70 per cent Fe and above for in excess of $US120 per tonne (at the time of writing).

For Mount Gibson chief executive officer Peter Kerr, the reopening of Koolan Island symbolises an opportunity to capitalise on the new demand for premium ore.

“The unique high-grade nature and premium quality of ore from the Koolan Main Pit means it is significantly more valuable than the material we have produced from the Mid West, which is why (Koolan Island) is such a compelling value creation opportunity,” he says.

“Its high iron grade and very low levels of alumina and phosphorous are very attractive for customers compared with hematite deposits in Australia and virtually anywhere else in the world.”

Kerr has also noticed increased interest from Chinese steel mills, which require the quality product to reduce environmental impact and meet tougher regulations.

“Higher grade ores enable steel mills to be both more productive and reduce their emissions intensity per tonne of steel produced, which has been a fundamental contributor to this trend,” he says.

It seems the reopening of Koolan Island couldn’t have come at a better time for Mount Gibson.

A similar visionary story applies to Havilah Resources, whose diverse portfolio of assets in Australia has become more focused on iron ore after it received a $100 million funding package from GFG Alliance in May.

The deal was the culmination of years of patience, as Havilah slowly acquired land in the iron rich Grants Basin in South Australia despite the collapse of the commodity in 2015.

For Havilah’s technical director Dr Chris Giles the acquisition of Grants Basin and the GFG Alliance funding is due to some longer term strategic thinking and then “the stars aligning” at the right time.

“When the price of iron ore collapsed, many shareholders and brokers said ‘don’t even mention the word iron ore, but we had the view that there was a huge area of potential iron ore in Grants Basin that had gone unrecognised,” he says.

“We drilled at the very western end of the basin in 2012 and got encouraging results, but the problem was we didn’t initially hold the key ground. Over the next four to five years from 2013-2018, while iron ore was in the doldrums, we acquired tenement holdings over the entire Grants Basin, but never had the funds to drill it.”

Drilling at Grants Basin. Image: Havilah Resources.

 

Luckily for Havilah, GFG Alliance believed its story and provided drill funding, which pointed to a 3.4 billion tonne  plus exploration target.

Down the railway line from Grants Basin at Whyalla steelworks, the small town of 21,000 people was on the verge of collapse after the steelworks’ owner Arrium had gone into voluntary submission due to $4 billion of debt.

The move was set to affect up to 3000 employees, many of whom took a 10 per cent pay cut to entice new buyers.

This grabbed the attention of GFG Alliance chief executive officer Sanjeev Gupta, the saviour of the small industrial town, who saw the potential of combining low transportation and production costs from the iron ore in Grants Basin as an unmissable opportunity.

“In the Whyalla Transformation plan, that includes the Next Gen Steel Plant, GFG Alliance is planning to make Whyalla a large-scale steel producing centre, with at least 10 times its present capacity and produced largely with renewable energy at a lower cost base than competitor steel mills,” Giles says.

“Havilah fits into this plan because Grants Basin is shaping as a very large iron ore deposit that could potentially supply the Whyalla steelworks for a very long period at the capacities they are requiring plus have ample surplus for export.”

Ultimately, the plan is that Whyalla is supplied iron ore from Havilah’s prospective mines, produces the steel and then sends it to GFG Alliance’s global steelworks to manufacture into finished products for local markets.

Havilah hadn’t initially planned for iron ore to be the company’s priority, but the opportunity was too good to refuse.

Perhaps the biggest potential, however, lies with Carpentaria Resources, which has started to capitalise on the wealth of iron ore caches at its flagship Hawsons Iron project near Broken Hill in New South Wales.

At 70 per cent Fe, its Hawson’s supergrade is said to be the purest iron products in the world.

With access to established rail, road, port and power infrastructure, managing director Quentin Hill sees massive upside given the state of the market.

“Even before the Vale disaster there was still a supply gap in the pellet feed market and high quality pellet feed, but the incident exacerbated it,” he says.

“(Vale) supplied half the world’s pellet feed which is our market and there’s always been a looming supply gap because of increased demand.”

The company expects the pellet feed usage in China to grow from its current 14 per cent use to 18 per cent with a market supply gap of up to 50 million tonnes per annum by 2022, according to CRU.

The result has been spikes in share prices for the major miners in 2019, with BHP up 18 per cent, Rio Tinto 31 per cent and Fortescue 75 per cent (at the time of writing).

While these junior mining companies might not have the ability to compete with the major iron producers globally, the potential for growth still remains high.

This article also appears in the June edition of Australian Mining. 

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