January 27, 2022

Iron-Ore Miners Strive to Avoid Past Mistakes as Prices Boom

Iron-ore’s record prices are encouraging a wave of investment in mining ventures, with companies hoping to avoid a repeat of the previous boom a decade ago that ended in multiple pit closures and abandoned developments.

Chinese companies are pushing to build one of the world’s biggest mines in West Africa, while a clutch of smaller companies are developing new mines in Australia or reopening mothballed pits idled years ago when prices were low. Many are betting that demand for iron ore, used to make steel, will remain buoyant as governments world-wide inject billions of dollars into their economies.

The benchmark iron-ore price rose to a record $233.10 a metric ton this month, according to data from S&P Global Platts, as China’s steel industry cranked up output. The rally mirrors gains in prices of commodities, including copper and crude oil, which are also in demand as the global economic recovery from the Covid-19 pandemic gathers pace.

New iron-ore entrants see an opportunity to thrive because the industry’s biggest producers are behaving differently than a decade ago.

BHP Group Ltd.

BHP 2.46%

and

Rio Tinto

RIO 3.47%

PLC, the world’s two largest mining companies, say they aren’t interested in producing much more iron ore in Australia, which accounts for more than half the world’s trade in the commodity. The pair’s current investments, which are still worth billions of dollars, aim to replace output from older pits, and they expect better demand growth in commodities like copper.

Another major iron-ore producer, Brazil’s

Vale SA,

is working to rebuild production following two deadly spills from dams storing mining waste. The big Western miners have also faced pressure to increase dividends to shareholders after splurging on deals and big projects across several commodities during the previous boom that were later written down by billions of dollars.

The previous boom exposed the risks of investing in underdeveloped areas. Many companies that raised billions of dollars to build mines, often in new iron-ore regions that lacked the rail and other infrastructure needed to make the projects viable, never produced a single ton of ore.

Few places illustrate the boom-to-bust commodity cycle more than the Bloom Lake operation in Canada. In 2011, when iron-ore prices previously surged to a record high,

Cleveland-Cliffs Inc.

paid roughly 4.9 billion Canadian dollars, the equivalent of $4.1 billion today, to buy Bloom Lake. When prices went into free fall five years later, the U.S. miner closed the pit and accepted an offer of C$10.5 million to get rid of it.

Today, investment is again flowing into Bloom Lake. The mine’s current owner,

Champion Iron Ltd.

CIA -3.79%

, restarted production in 2018 and is spending C$589.8 million on doubling the mine’s annual output capacity to 15 million tons of iron ore. The company is contemplating a further expansion and recently bought another iron-ore deposit nearby.

Champion Iron, which this week reported a fivefold increase in annual profit, wants to sell more iron ore to U.S. steel mills and less to China, a different strategy than pursued by Cleveland-Cliffs a decade earlier. The company is also producing more of a high-grade 67.6% concentrate that can be used by electric arc furnaces to supplement scrap and can be sold at a premium.

Today, investment is again flowing into Champion Iron’s Bloom Lake operation in Canada, seen in 2016.



Photo:

staff/Reuters

“I want us to have a product diversification [because] when the market does turn, it could cause us a problem,” said

Michael O’Keeffe,

executive chairman of Champion Iron.

Mindful of not repeating past mistakes, many aspiring iron-ore companies are targeting small projects that can start up quickly and be developed in stages. To keep upfront costs down, they are relying on trucks rather than building rail lines to transport ore.

“We’re seeing new entrants enter into flexible mining and infrastructure arrangements that enable mines to close without financial penalty if prices fall below their break-even point,” said

Rohan Kendall,

analyst at consulting firm Wood Mackenzie.

The consulting firm estimates 20 new mines with a total annual capacity of 150 million tons will start this year—excluding any in China—a five-year high in capacity terms. Last year, just 5 million tons of capacity was added, down from 14 million tons in 2019.

Iron ore has seen a bigger rush of new entrants than many other mined commodities—which have also been rallying—largely because companies don’t need massive amounts of cash upfront for mine-site infrastructure as with metals like copper. Deposits are relatively abundant and easy to mine, scraped off the Earth’s surface, crushed and hauled to port for shipping.

But whether an iron-ore mine can survive a downturn in prices ultimately comes down to costs, Mr. Kendall said.

BHP and Rio Tinto benefit from owning existing railways and port infrastructure, making them more resilient to a deep downturn in prices. In 2020, Rio Tinto had an underlying profit margin of 74% on Australian iron ore that fetched an average $98.90 a ton.

Rio Tinto is facing a decision on whether to help develop Guinea’s Simandou iron-ore deposit, in which it owns a stake. Chinese companies are pushing to develop Simandou’s ore, which would require a 400-mile railway to the coast. However, the deposit is so big that some analysts think development could cut long-term prices of iron ore by more than 10%, threatening to make Rio Tinto’s operations in Australia and Canada less profitable.

Many analysts think iron-ore prices will fall soon. Capital Economics expects them to drop to $140 a ton by year’s end. A repeat of the previous mining investment boom is unlikely, partly because miners will be mindful of China’s plans to curb carbon emissions in steelmaking, it says.

Eduardo Bartolomeo,

Vale’s chief executive, expects this iron-ore cycle will be different because the previous one was underpinned by a demand shock from China’s urbanization.

“What we see now is a very heated market that we call ‘stronger for longer,’” he said. “We will bring back supply, but we don’t believe the market will soften in the next two years.”

SHARE YOUR THOUGHTS

What’s your take on investing in iron-ore ventures or other commodities? Join the conversation below.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Related Posts

Saudi Retail Magnate to List 432 Park Penthouse For as Much as $170 Million

June 28, 2021

June 28, 2021

Saudi retail and real-estate magnate Fawaz Al Hokair is planning to list his penthouse at 432 Park Avenue—one of New...

U.S. Retail Spending Fell 1.3% in May

June 15, 2021

June 15, 2021

Retail sales dropped 1.3% in May as shoppers pulled back on goods purchases and shifted more of their spending to...

Electric-Vehicle Spat Looms Over Biden’s Meeting With Canadian, Mexican Leaders

November 19, 2021

November 19, 2021

President Biden’s summit with counterparts from Canada and Mexico at the White House brought him face to face with leaders...

Can America’s Solar Power Industry Compete with China’s? One Firm Tries.

June 21, 2021

June 21, 2021

WALBRIDGE, Ohio—Solar panels are part of any formula for fighting climate change, yet the U.S. makes few of them, since...

Virgin Galactic Gets FAA Approval to Fly Customers to Space

June 25, 2021

June 25, 2021

Richard Branson’s Virgin Galactic Holdings Inc. said Friday the Federal Aviation Administration will allow it to fly customers to space....

CDC Extends Federal Eviction Moratorium Through July

June 24, 2021

June 24, 2021

WASHINGTON—The Biden administration has issued a monthlong extension of a moratorium, through July, on the eviction of tenants who have...

Trumps Selling Prized Washington, D.C., Hotel for $375 Million

November 15, 2021

November 15, 2021

Donald Trump’s family hotel company has reached an agreement to sell the rights to its Washington, D.C., hotel for $375...

Didi Sets Valuation Target of $62 Billion to $67 Billion in IPO

June 24, 2021

June 24, 2021

Didi Global Inc., the Beijing-based ride-hailing company, is targeting a valuation of $62 billion to $67 billion in its IPO,...

Jobless Claims Rose Last Week, Pausing Downward Trend

June 17, 2021

June 17, 2021

Worker filings for initial unemployment benefits rose by 37,000 to 412,000 last week, marking the first increase since late April...

Lawsuit Accuses McDonald’s of Racially Discriminatory Ad Spending

May 21, 2021

May 21, 2021

Two companies owned by media mogul Byron Allen have filed a lawsuit against McDonald’s Corp. , accusing the fast-food giant...

United Plans to Buy 15 Supersonic Planes

June 3, 2021

June 3, 2021

United Airlines said it hopes to fly passengers on a planned new supersonic jetliner by the end of the decade....

Corporate America and Hollywood: A Love Story

May 29, 2021

May 29, 2021

The tech giants stormed Hollywood this past week: Amazon.com Inc. announced its plan to buy the storied MGM studio for...

PE-Backed Hospital Chain Got Help From Major Landlord as Losses Mounted

June 18, 2021

June 18, 2021

Medical Properties Trust Inc. MPW -4.89% is a little-known real-estate investor that helps private-equity firms cash in on their hospital...

From ‘FBI’ to ‘The Wonder Years,’ TV Networks Bet on More Franchises, Reboots

May 24, 2021

May 24, 2021

As ratings fall and viewers decamp to streaming platforms with fewer or no commercials, broadcasters are embracing the adage that...

Warby Parker Founders Explain Why They Are Adding 35 Stores After Pandemic

May 29, 2021

May 29, 2021

Last year, the pandemic forced many Warby Parker customers to try shopping online for their eyeglasses. Now, as online sales...