Cliffs Natural Resources (NYSE:CLF), formerly the region’s key player, abandoned work at its project there almost a year ago, and since then new CEO Lourenco Goncalves has made it abundantly clear that there will be no return. The company is in the midst of selling its non-US assets, and Goncalves told the Financial Post recently, “I don’t believe under my watch, and I plan to stay [alive] for the next 50 years… that the Ring of Fire will be developed.”
The reason for his pessimism is simple: lack of infrastructure. “The Ring of Fire is a remote land with no railroad, no road, nothing. Without the infrastructure, there’s nothing we can do,” Goncalves said. He also has little hope for the juniors — notably KWG Resources (TSXV:KWG) and Noront Resources (TSXV:NOT) — working in the area, and told the Post, “[t]hey do not have any money.”
On a different, but similarly negative note, a CBC News article published in October posits that, contrary to popular belief, chromium is not a “rare and valuable mineral.” The news outlet quotes Northern Miner editor John Cumming as saying, “[t]here’s really an oversupply of chromium. You can mine chromium by going to a waste dump in South Africa, so there’s not a great need for a new source.”
Juniors not giving up
Given all that negative press, some believe it’s a question of when — not if — the Ring of Fire’s junior miners will follow Cliffs’ lead and exit the region.
Yet thus far they have not done so. Quite the opposite, in fact. Executives at both Noront and KWG have recently expressed a keen interest in acquiring Cliffs’ chromite assets, with Noront President and CEO Alan Coutts saying, “[i]f we don’t get a call from the new [Cliffs] management, we’ll be phoning them,” and Moe Lavigne, vice president of exploration and development at KWG, commenting that his company is a “potential buyer.”
To find out why KWG still believes in the region, Chromium Investing News spoke with Lavigne, who made it clear that many of the negative comments circulating about the Ring of Fire aren’t based on facts. He also provided a fair assessment of what needs to happen for his company to succeed.
South African chromium
Lavigne began by clearing the air on South African chromium. “South Africa has a huge chromium resource that could supply the planet for the next 500 years. But it’s also a chromium resource that has a very high extraction cost because it’s a very thin layer deep beneath the surface,” he said. It’s also “very labor intensive to actually mine it, and very expensive to mine it.”
Furthermore, it’s his belief that the existence of chromium elsewhere shouldn’t stop companies in the Ring of Fire from pushing forward. “It’s really irrelevant that there’s a big stockpile of chromite in South Africa. What we have to do here is use our technology and our know how to extract the resources efficiently and insert our product into the market,” he said.
To make his point Lavigne gave the example of Outokumpu (HEL:OUT1V), now the world’s largest producer of stainless steel. “Back in the late ‘50s, chrome at [the company’s] Kemi deposit was averaging 26 percent chromium,” while its competitors were averaging about 43 percent, he explained. However, rather than giving up, Outokumpu decided to make Kemi work.
“Nothing is impossible if you put your brain the problem. You can monetize something that has a lot of worth in the ground,” he emphasized, adding, “the price of ferrochrome, which is the main indicator of the value of chromium, for the last four years has been flat. It hasn’t declined.”
Cliffs’ assets nice, but not necessary
Lavigne also clarified that while KWG is certainly interested in buying Cliffs’ chromite assets, it does not need them.
“We have control of one chromite deposit, and we own 30 percent of another one,” he explained. “We are taking a run at buying the Cliffs assets, which would be great — that would consolidate the ownership of both of the chromite deposits under one roof. But our plan is absolutely not contingent on that transaction taking place.”
But what exactly is that plan? Speaking to that question, Lavigne said, “in the Ring of Fire, KWG’s intention is not simply to mine chromite to produce ferrochrome, but also to take it several steps beyond and produce stainless steel.”
Specifically, the company is looking to produce “ingots of stainless steel custom made for each individual customer to their specifications.” He noted, “that’s a business that’s very viable, and we intend on pursuing it.”
What makes stainless steel production a viable option for KWG is the company’s new method of refining chromite ore into ferrochrome using natural gas. As Lavigne said, “dollar costs of the energy that we would use in that process … will end up being less than 50 percent of the cost” of using electricity in the refining process.
He added, “natural gas is kind of the great equalizer because they sell it for pretty much the same price throughout the country. We’ll be able to build smelters anywhere we have a reliable source of natural gas, which is pretty much anywhere along the TransCanada (TSX:TRP) pipeline.”
In search of a partner
That said, KWG can’t proceed with its planned course of action alone. “We’re a junior, we’re looking for a senior partner,” Lavigne explained.
His hope is that the talks KWG is having with a global steel company and large ferrochrome producer will lead to such a partnership. “We’re having discussions with two very significant corporations about partnerships on different aspects of the business that we’re proposing,” he said. “That’s everything from mining to producing stainless steel. The discussions are ongoing.”
Having a senior partner will also help KWG gain access to markets to sell the materials it produces, which, according to Lavigne is often a hurdle for industrial metals projects.
Infrastructure admittedly an issue
Lavigne also readily admitted that infrastructure is indeed another issue KWG will need to tackle.
“From our perspective, the major hurdle is that we have to attract a third-party investment to the project,” he said. However, what’s stopping that from happening is uncertainty surrounding infrastructure. While the Ontario government has committed to spending $1 billion on Ring of Fire transportation (with or without federal government support) there’s no clear plan on what will be done with that money.
“Those investors will not invest in something unless they know when they’re going to have a return on their investment. They have to have a date when they’re going to get a return on their investment,” Lavigne stated. “At the moment we cannot pin down that date because there is no commitment from the province of Ontario and the First Nations to an infrastructure plan for the area.”
In terms of what type of infrastructure KWG would like to see, Lavigne said that since 2009 the company has been advocating for the Ontario government’s railroad company to extend its track “either to a point close to the Ring of Fire, or all the way to the Ring of Fire.”
The cost savings of doing so would be significant, he noted, pointing out that “if you were to haul the chromite out by truck, it would cost $60 a tonne,” whereas taking it out by train would cost $10 a tonne — a difference of $50. That’s important because “a tonne of chromite is only worth about $200.”
He concluded, “if we’re going to make the chromite deposits in the Ring of Fire economically viable, we need to bring down costs.”
The message from Lavigne was clear: there’s still value in the Ring of Fire, but it will be tough for companies to extract it without help with infrastructure from the Ontario government — and that means quicker negotiations between the province and First Nations are needed.
Investors who still believe the region has promise would thus do well to hope that those parties step up.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.