The Conversation (0)
The chief executive officer of Cliffs Natural Resources announced on Wednesday morning that the company is looking at closing its Bloom Lake project in Eastern Canada, sparking a slump in share price.
In a brief statement released Wednesday morning, Goncalves wrote that the exit strategy may result in the closure of the Bloom Lake mine.
“Despite the continued interest of the prospective equity partners in Bloom Lake and in its high quality ore, the potential investment is not achievable within a time frame acceptable to Cliffs. With expansion no longer viable, we have shifted our focus to executing an exit option for Eastern Canadian operations that minimizes the cash outflows and associated liabilities,” he said.
Nucor (NYSE:NUE), a US-based steelmaker, is rumored to have been in talks with Cliffs about investing in the project at the end of October, but no deal was reached.
Work required to boost ore output to 13.5 million tonnes a year is pegged at roughly $1.2 billion. If the company does close the mine, it says it will cost in the region of $650 million to $700 million in the next five years.
The news looks set to close the door on a project that’s long been troubled. In October, Cliffs took a $6-billion writedown – with a third-quarter loss of $5.9 billion – that was largely attributed to the poor performance of Bloom Lake.
“Despite continued cost cutting progress at Bloom Lake, Phase I is not feasible. By the end of this year, we will have a solution for Bloom Lake,” Goncalves said at the time.
In response to Wednesday’s news, Cliffs’ share price finished down 20 percent, at $8.15. The company has seen a year-to-date loss of 68.83 percent ($17).
The decline is not surprising given that Cliffs, like many other iron ore companies, has taken a hit as Chinese construction has slowed. According to Bloomberg, large mining companies such as BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) and Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) bet that Chinese construction demands wouldn’t wane until 2030. They were seemingly wrong — Bloomberg states that the country could hit peak steel output in as soon as three years, with widespread plant closures expected afterwards.
“Humans make mistakes,” said Kirill Chuyko, head of equity research at BCS Financial Group, who thinks peak steel has been reached. “Chinese demand is going south.”
Iron has dropped roughly 37 percent this year, making it the worst performer of all the ores. Companies fear that the world may be in the grip of a surplus of the base metal.
Securities Disclosure: I, Nick Wells, hold no direct or indirect investment in any of the companies mentioned in this article.
