Low Iron Ore Price May Take Casualties in Labrador

The iron ore price’s ongoing fall has taken a major toll on the industry, making it difficult for both higher-cost producers and junior exploration companies to survive. On Wednesday, the bad news in the iron ore space was centered on Western Labrador.
The day saw Alderon Iron Ore (TSX:ADV,NYSEMKT:AXX) announce plans to delay the construction of its much-anticipated Kami project. The company cited the current depressed state of the market as well as recent changes in company ownership as the reasons behind the financing delay.
Alderon implemented a comprehensive cash conservation program in December of last year in an attempt to maintain a “healthy working capital position into 2017 without the need to access equity or debt financing … aside from the financing required to commence construction at Kami.” However, the continued drop in the iron ore price has meant financing Kami “has taken longer than anticipated,” with further delays expected if the iron ore price remains low.
As a result, the company is now intensifying its cash conservation measures. For example, it’s decided to close its Montreal office and will now be solely based in Vancouver. Furthermore, it’s made changes to its management team, with President and CEO Tayfun Eldem transitioning from his current role to become vice chairman. Mark Morabito will move from his executive chairman position to takeover Eldem’s role as CEO.
Elaborating on his and the company’s future plans, Morabito said, “Alderon management recently traveled to Beijing, China to present and discuss its project re-scoping plans with HBIS, Chinese government agencies and Chinese banks. HBIS has confirmed its commitment to the Kami Project and Chinese banks continue to be interested in exploring the financing of the Kami Project. As a result of these meetings, Alderon is going to proceed with a re-scope of the project in order to identify savings resulting from the current market environment and HBIS and the Chinese banks have agreed to participate in the process. If cost savings can be identified in the re-scope of the project, this will provide significant assistance in completing the financing plan for the Kami Project.”

Uncertainty at IOC’s Labrador West operation

Also on Wednesday, Iron Ore Company of Canada (IOC) said its Labrador West operations are under threat of closure due to the low iron ore price, but added that cost-saving initiatives and recent productivity gains have added some bright spots to the situation. However, analysts aren’t as optimistic about the company’s future.
Raymond James put out a report that suggests Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), a majority owner of IOC, is losing money at Labrador West, also noting that costs must come down or the iron ore price must go up for IOC to remain a viable operation.
“By our estimates, IOC’s costs of production are above the price of iron ore, putting pressure on both Labrador Iron Ore Royalty Corp’s (TSX:LIF) and IOC’s working capital and ability to sustain production. If costs don’t come down sufficiently or iron ore prices don’t rise, we think the probability of IOC stopping production before year-end, at least temporarily, is high,” the firm states.
As mentioned, output from IOC has increased, rising by about 20 percent, to 21 million tonnes of iron ore per year, and the mine has also increased its efficiency. Mike Wickersham, vice president of northern operations, told CBC News that IOC is breaking even at the current price. Still, the company is considered a high-cost producer, and if the iron ore price remains depressed it may succumb to the pressure.

Mining industry in Labrador on the rocks

Labrador was built around iron ore mining, and the Labrador Trough is home to several world-class iron ore deposits, meaning it has been hit hard by the falling iron ore price. Indeed, the area is still feeling the effects of the closure of Cliffs Natural Resources’ (NYSE:CLF) Wabush mine last year.
News of the delay from Alderon and the possible closure of IOC’s operation has led politicians in Labrador to voice their concerns regarding mining industry downtown. Liberal leader Dwight Ball told CBC News that the province needs to ensure that Labrador remains an attractive place for mining companies to do business. Ball also said that other areas, such as hydroelectricity, should become a focus. Conversely, Lorraine Michael of the NDP has noted the dangers of relying on both the industry and a handful of private companies to keep the economy in a viable state.
While the future of both companies remains to be seen, it is evident that a more stable iron ore price is needed to give Labrador’s mining industry a boost and to continue to unlock its resource potential.
 
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
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