Wabush Mines closure not a first domino: industry analyst
In business, a common mantra is: better, cheaper, faster. The iron ore mining operation in Wabush was unable to live to that code in recent years, resulting in Cliffs Natural Resources’ decision to idle the mine.
The decision has thrown hundreds out of work and, without quick turnaround by another company, will also cost millions in mining royalties annually to the province.
With that said, by both company reports and the views of industry experts, Cleveland-based Cliffs faced some unique challenges in the iron-rich Labrador Trough and the mine idling is not expected to be repeated across the board.
Cliffs took control of the Wabush mine on Feb. 1, 2010, buying out the 28.6 per cent interest being held by Dofasco, a subsidiary of ArcelorMittal. In 2011, it went on to acquire Consolidated Thompson, including its 75 per cent hold on the Bloom Lake property on the Quebec side of the border.
Together, the Wabush and Bloom Lake mines acted as Cliffs’ Eastern Canadian assets. And together, the mines have underperformed, costing more than expected while iron ore prices have slipped.
“The Bloom Lake mine purchased when Cliffs acquired Consolidate Thompson a few years ago has never really lived up to expectations. The mill capacity — as in how much ore is put through and how much iron ore is sold — has never quite gone along with the planned capacity, which is eight million tonnes. Because of that, and other issues, the unit cash costs have been higher than expected and the mine has struggled to make a profit or generate any cash flow,” said Tony Robson, a specialist on metals and mining with BMO Capital Markets, based in Toronto.
“At the same time, the Wabush operations where Cliffs bought out a couple of joint venture partners also a few years ago has had problems with water ingress — water coming into the pits,” he said, “and in the last year, we’ve also seen a fall in the price of iron ore pellets, which Wabush Mines was principally producing.”
With new production coming online in Australia and to a lesser extent Brazil, BMO is forecasting an eight per cent increase in iron ore production globally, with the expectation in turn of lower prices in the second half of this year and into 2015.
“That may be part of the decision-making process that Cliffs management has taken to close Wabush,” Robson said.
In making its announcement on Wabush, Cliffs emphasized the high cost of production, running to $143 per ton in the fourth quarter of 2013.
To put the number in perspective, in October the company reported it was expecting a cash cost per ton of $115-$120 for the year. The cost at Bloom Lake, for the same period, was pegged at $90-$95.
“The difference between the Bloom Lake and Wabush operations and Rio Tinto’s Iron Ore Company of Canada, IOC, mines and also ArcelorMittal’s mines further to the West ... is they have lower costs and are more profitable,” Robson said, comparing Cliffs’ operations to others.
Every operation has its own economics, its own structure that would dictate its success and eventual support in the marketplace. Ed Moriarity, executive director, Mining Industry NL
Labrador MP Yvonne Jones said she had been hearing rumblings about Wabush Mines, learning the operation was the highest-cost producer per ton of iron ore anywhere in North America.
“If you look at the analyst reports that came out in early February, obviously we could suspect that there was something going on. However, I certainly did not expect at 4 o’clock yesterday evening to get a call from the company saying they were going into an idle shutdown and 400 workers (in Wabush) would be displaced,” she said, speaking with The Telegram by phone from Ottawa Wednesday.
Jones said she believes the mine remains a viable investment for another company and there is some debate to be had around the factors influencing costs at the Wabush operation.
“It’s not fiscally prudent for the company at this time, but does that mean that it’s not going to be fiscally prudent for other companies down the road? No, it does not,” she said.
Ed Moriarity, Mining Industry NL’s executive director, echoed Jones’ comments about the company’s announcement on Wabush.
“Generally speaking, in our community, (the idling) came as a bit of a surprise,” he said.
“I think moving forward, the bigger picture, we’ve still got a valuable resource and a variety of project opportunities in the area and we need to continue to promote and attract investment.”
He cautioned against individuals, government, business leaders, investors and the media painting all iron ore operations in Labrador with a single brush.
“Every operation is unique in its own way. Every operation has its own economics, its own structure that would dictate its success and eventual support in the marketplace,” he said.
A number of factors affect overall mine costs, including everything from the age of the resource to the mine’s infrastructure, the efficiency of the operation, renewal costs for capital infrastructure and the cost of labour.
The Wabush mine has been in operation since 1965.
In 2011 and 2012, Cliffs reported equipment problems affecting production at the mine.
Under a five-year agreement, set to expire at the end of this month, labour costs increased by 15 per cent.
Cliffs Natural Resources will be releasing its fourth quarter results today and has scheduled a webcast conference call (ir.cliffsnaturalresources.com) for 11:30 a.m. NLT on Friday.