Last month, we took a look inside the development of the Labrador Trough, a 1.2-million-square-kilometer area spanning the border between Labrador and the Canadian province of Quebec. Right now, about 15 billion tonnes of iron ore are being explored in this region — enough to catapult the country from an also-ran to the world’s third-biggest producer.
As a follow-up to that article, we caught up with Wojtek Nowak, Research Analyst with Fraser Mackenzie, to take a closer look at the Trough’s future and to spotlight some potential profit opportunities for astute investors.
IIN: What are the major factors you see driving the development of the Labrador Trough?
Wojtek Nowak: One of the biggest macroeconomic factors is the rapid industrialization of China and India, which is pushing up steel production [iron ore is a key element of steelmaking]. China, which is the biggest driver, is also looking to get away from the big three major mining companies — Vale (NYSE:VALE), BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) and Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) — and control its own assets. The Labrador Trough is a good fit. Brazil and Australia are dominated by the big three, and Western Africa has vast reserves, but also significant political risk.
The Trough, on the other hand, is already established. There is production happening there now — foreign mining companies are currently involved, and there is a lot of management and labor skill. There is also significant infrastructure in place, with the potential to add more.
China’s economy has slowed, but the longer-term trend toward urbanization is still there. The country’s use of steel per capita, for example, still lags behind that of developed countries, so there is a gap to be filled.
IIN: So much of the Labrador Trough’s development depends on getting the infrastructure right. How do you feel that’s progressing?
WN: There is sufficient infrastructure there now for developers to proceed with their initial plans. Particularly in the southern part of the Trough, there is rail with enough capacity for now, and there will be a port down the road [at Sept-Îles, scheduled to open in March 2014], so I don’t see a problem with shipping access.
Over the longer term, though, there will need to be more rail to accommodate everyone’s expansion plans. Developers in the more remote section of the Trough, north of Schefferville, are especially under-served.
Of course, the third pillar of all this is power. The Quebec-based projects have adequate electricity supplies, while those in Labrador are more constrained. The proposed hydroelectric project at Muskrat Falls will help, but you still have to sort out the transmission grid.
IIN: The initiatives outlined in the Quebec government’s Plan Nord are a key piece of the infrastructure puzzle. What’s your take on the election in the province, and what do you think will happen if the Parti Québécois, which has voiced concerns about Plan Nord, wins?
WN: The Parti Québécois appears to support developing the north, but they don’t like the idea of enriching foreign mining firms, so they are proposing higher taxes on excessive profits and an increased royalty rate.
Overall, I feel the general premise of Plan Nord will remain intact, but it will be tweaked to be more in favor of the province. In terms of infrastructure, I don’t see it having much of an impact on the port of Sept-Îles, for example, where there is investment from the federal government, or the new rail line that Canadian National Railway (TSX:CNR,NYSE:CNI) is proposing.
Where higher royalty rates or a tax on foreign miners may have an impact is on mines planned by overseas companies or joint ventures that involve them. It’s also important to keep in mind that none of this would affect Labrador, where companies like Alderon Iron Ore (TSX:ADV,NYSE:AXX), New Millenium Iron (TSX:NML) and Century Iron Mines (TSX:FER) have a presence.
IIN: Iron ore prices are down right now. When do you foresee an upturn, and what impact do you feel lower prices are having on projects in the Trough?
WN: The next few quarters could see depressed iron ore prices until China rights its ship. That will happen, but it’s a big economy, and it takes a while for it to change course. Right now, we’re assuming an iron ore price of $110 per tonne, which is within range of what many companies are using in their development models.
The lower prices are currently having a bigger impact on producers. Labrador Iron Mines (TSX:LIM), for example, is seeing pressure on its profit margins and is pushing out its capital expenditure plans.
Developers, however, will be less affected. Their challenge will be access to capital. Because of the lower iron ore price, investors will be more discerning and will favor companies with any kind of advantage over those that are late to the party.
IIN: Which junior miners operating in the Trough are you keeping an eye on now?
WN: I’m currently covering Alderon Iron Ore, Champion Minerals (TSX:CHM) and Cap-Ex Ventures (TSXV:CEV,OTCQX:CPXVF). Both Champion and Alderon are at the feasibility stage, and both have properties in the south, where there is more infrastructure and production activity. These companies also have strong management teams with lots of experience working in the area — they know what needs to be done and how to do it.
Alderon is the furthest along, thanks to its recent deal with Hebei Iron and Steel Group. It plans to start production in 2015. Champion has yet to secure a joint venture/offtake partner and has a larger rail component to sort out, but its market cap is less than half of Alderon’s, so there is tremendous upside potential for investors there.
Cap-Ex’s properties are located just north of Schefferville. It hasn’t yet outlined a resource, but its drill results so far suggest a massive iron ore deposit. This company also has strong, experienced management with ties to Alderon and Consolidated Thompson. In addition, Cap-Ex’s market cap is less than one-tenth of Alderon’s, so again there is tremendous upside potential.
IIN: Where do you think mining in the Labrador Trough will be five to 10 years from now?
WN: I think we’ll have more production tonnage and stronger infrastructure on the rail, port and power sides. I think it’s realistic to assume a doubling of production within that timeframe, from around 40 million tonnes now to around 80 million.
IIN: What other factors do you feel investors looking at the Labrador Trough should be aware of?
WN: I think there has been a shift in the value that investors are placing on project execution versus the size of the resource. In years past, the size of the resource was paramount. Now, I think many investors feel it’s important to have a big enough resource, but they are placing more emphasis on the investments being made to push the project along. Investors in the Trough should look for clear evidence that a company’s projects are progressing and that it has a management team with solid experience.
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.