For much of the past decade, Asian investors spent billions of dollars on iron-ore deposits in the Australian Outback in an attempt to break BHP Billiton BHP.AU -0.06% and Rio Tinto's RIO.AU -0.27% stranglehold on the commodity.
They bet on the wrong iron ore.
Companies including China's Ansteel Mining Co. and Japan's Mitsubishi Corp. 8058.TO +0.16% have halted or scaled back plans to open up a new mining hub in Western Australia for a low-grade ore known as magnetite. Magnetite is more costly to produce than hematite, the ore typically found at BHP's and Rio Tinto's RIO.AU -0.27% mines.
When worries about a global shortfall in iron-ore supply drove prices of the commodity to a peak above US$190 a ton in 2011, magnetite looked attractive. Much of the Asian investment flowed into the Midwest region of Western Australia, estimated to contain 13 billion tons of magnetite ore—enough to meet Chinese demand for around a decade at current demand.
But a fall in iron-ore prices to a five-year low below $83 a ton is threatening those investments. The most-prominent example of an unprofitable magnetite mine is the US$10 billion Sino Iron project in Western Australia developed by Citic 0267.HK -2.82% Pacific, recently renamed Citic Ltd., which went online last year.
China's Sinosteel Corp. hoped to produce magnetite from the Koolanooka deposit, acquired through its 1.36 billion Australian dollar (US$1.25 billion) hostile takeover of Midwest Corp. in 2008, but progress has been slow.
Asian investors failed to reckon with the world's biggest iron-ore miners, which have been ramping up output of more-profitable hematite ore in Australia's Pilbara region, where they have enormous efficiencies of scale. That has triggered concerns about a global glut of iron ore that will take years to clear.
"The future of new magnetite projects in Australia is no longer clear," said Daniel Morgan, a Sydney-based analyst at UBS. "There's a lot of hematite coming into the market, and it can come quicker and at a lower cost."
Magnetite is more common than the hematite that constitutes much of the global trade in iron ore, and contains a purer form of iron. But magnetite tends to be found in thin layers in the Earth's crust. That means there is less mineral and more waste rock in what's extracted: magnetite has less than 50% iron content; hematite typically has more than 60%.
High-grade hematite—which is a reddish color—often is referred to as "direct-shipping ore" because of the minimal amount of processing needed before it is loaded on ships bound for Asian steel mills' blast furnaces. Magnetite—black and highly magnetic—requires expensive infrastructure such as crushers and concentrators to turn it into a material that steelmakers can use.
Some Asian magnetite mining ventures have found it impossible to stay afloat. IMX Resources Ltd. , of which China's Sichuan Taifeng Group Co. is a major shareholder, in June said falling iron-ore prices would force it to close the Cairn Hill mine in South Australia, which produces magnetite and copper. The company this week sold its Mt Woods magnetite deposit to focus on nickel, graphite and gold exploration in Tanzania instead.
The withdrawal is especially evident in Western Australia. Three years ago, Deloitte Access Economics forecast that the state would receive the lion's share of magnetite's boost to the nation's economy, estimated at A$4.5 billion in revenue and 4,000 jobs.
Now, many of the biggest magnetite developments in the state are on hold. Mitsubishi, which bought out its partner in the Jack Hills mine and Oakajee port-and-rail project for A$325 million, said both projects are delayed indefinitely. "We think Jack Hills is a good asset, but this isn't a good time to proceed," a Mitsubishi spokeswoman said. "Iron-ore prices are not good."
Gindalbie Metals Ltd. last month said it would write down the value of its Karara Mining Ltd. venture with China's Ansteel by A$640 million, citing the slump in iron-ore prices. Six months earlier Gindalbie handed majority ownership of Karara Mining to Ansteel as part of an effort to raise A$60 million after its auditors raised concerns about the company's ability to stay solvent.
UBS estimates Gindalbie needs iron ore to fetch US$100 a ton to break even—double that for Rio Tinto and BHP. Ansteel and Gindalbie declined to comment.
Analysts said Asian companies aren't likely to dump their magnetite investments even if they are running at a loss, as executives remain concerned about the dominance of a handful of iron-ore miners. Global output by the top five producers— Vale SA, VALE3.BR +0.92% BHP, Rio Tinto, Anglo American AAL.LN -0.80% PLC and Fortescue Metals Group Ltd. FMG.AU +0.76% —is expected to rise more than 40% to more than 1.5 billion tons by 2017.
"We expect mills will be extremely reluctant to raise their reliance on the major producers," said Ian Roper, a resources analyst at CLSA.
Mitsubishi said it isn't giving up on magnetite, since the material has fewer impurities than hematite so can make high-quality steel. "It's true that magnetite is costlier because we have to make it into a concentrate.…But that concentrate contains more iron [than hematite ore] and is traded at higher prices," a spokeswoman said.
Source: The Wall Street Journal
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