There’s No Shortage of Iron Ore — There’s a Shortage of it at the Right Cost

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Two features of Chinese political and industrial policy have been consistent over the years: the willingness to plan long term and deep pockets to finance those plans.

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A major state-owned steelmaker and mining company, Sinosteel, has epitomized this in western Australia.

The steelmaker has bought into the region’s lower-grade iron ore resources back in the last decade, in what was seen at the time as a potential rival to the country’s largest iron ore producing region further north at Pilbara.

A collapse in iron ore prices largely brought a halt to not just Sinosteel’s ambitions but those of joint venture partners and competitors Mitsubishi. During the five-year life of Mitsubishi’s Stage 1 operations at nearby Jack Hills, it produced and shipped around 1.8 million tons of lump and fines DSO each year.

Jack Hills, owned by Mitsubishi via its Crosslands subsidiary, was closed in 2015. Sinosteel’s Weld Range also closed, set to be a $2 billion iron ore project in the region when the Oakajee deepwater Port and 570-kilometer rail project was also shelved following cost blowouts that forced up proposed port fees, Reuters reported.

It was hoped Mitsubishi would come to the rescue when it paid A$325 million for the balance 50% stake in Oakerjee that it did not own.

But as iron ore prices continued to slide, the project was shelved — until now.

Following a year in which iron prices have been at their highest since 2014, Sinosteel has acquired Oakerjee and Crosslands (pretty much for free, by all accounts). Reuters reported Sinosteel will control both the port tariffs and the Weld Range mine, not to mention other iron ore assets in the region, assuming Oakajee’s port and rail assets are ever built.

Officially, there are no current plans to construct the deep-water port at Oakajee, nor the network of railways that were going to connect it to the iron ore mines at Jack Hills, Weld Range and related assets.

But documents filed with the Australian Securities and Investments Commission last week show two Sinosteel subsidiaries are the buyers, the article reports. The documents suggest the two subsidiaries paid the just $3 each for their respective 50% stakes in Oakajee Port and Rail, the company that owns the studies and intellectual property for the Oakajee railway network and deep-water port.

One of the Sinosteel subsidiaries was also said to have been transferred all shares in Crosslands Resources, the company that holds the nearby Jack Hills iron ore project. Crosslands is reliant on Oakajee Port and Rail building the port and rail infrastructure to get its product economically to market; so, without the port, the assets is essentially a dead duck.

Maybe not surprisingly, ASIC documents say Crosslands was sold for nothing.

On the face of it, it’s a huge loss for Mitsubishi, which had spent hundreds of millions buying into the related projects and investing in Jack Hills. Meanwhile, it’s a zero cost gain for Sinosteel, but it now leaves the Chinese with the need to invest the best part of A$10 billion to develop the port, rail infrastructure and mines.

With much of the local resources in the form of low-grade magnetite ore, investment will be needed to process the ore from 30-50% purity to 65-70% concentrate, an energy-intensive process that has historically made magnetite deposits largely uneconomical in western Australia.

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Sinosteel may therefore decide to sit on its asset until iron ore prices rise and/or the technology to reduce energy requirements in the concentration process makes the region’s magnetite more economical.

Fortescue appears to be making progress in that direction, Reuters reported, at its Iron Bridge property, halving the energy inputs by improved efficiencies. Even so deep pockets and a willingness to play the long game will be needed by Sinosteel if the region is ever to see its potential realized.

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