Baffinland confirms vast iron ore play
ANDY HOFFMAN
Globe and Mail Update
February 19, 2008 at 10:34 PM EST
Call it an overnight success story more than 45 years in the making.
Amid skyrocketing prices for iron ore, Baffinland Iron Ore Mines Corp. confirmed Tuesday that its Mary River project in Nunavut, first discovered in 1962, is one of the largest undeveloped iron ore deposits in the world, containing 365 million tonnes of proven and probable reserves.
The major impediment for Baffinland is the fact the valuable metal, used in the production of steel, is found among the permafrost and 24-hour winter darkness of Baffin Island, some 3,200 kilometres from its head office in Toronto.
The feasibility study estimates it will cost $4.1-billion to build Mary River, including 145 kilometres of rail lines as well as ports to accommodate the ice-breaking ships that will transport the iron ore to steel-making customers in Europe.
Construction and logistics are not, however, the largest hurdle the junior miner will have to overcome if it wants to start production by its target of 2014, said president and chief executive Gordon McCreary.
“The biggest challenge is raising the money … This is not the kind of asset that is normally in the hands of a junior company,” Mr. McCreary said in an interview.
Constricted credit markets have made raising capital exceedingly difficult for junior miners. However, record iron ore prices are expected to bolster efforts to finance what some have called the “Mackenzie Valley Pipeline of the Eastern Arctic” – referring to the project's massive scale.
On Monday, industry giant Companhia Vale do Rio Doce (Vale) became the first iron ore producer to reveal contract prices for 2008, as strong demand from China's booming economy and production problems in Australia keep supply tight. The Brazilian mining major said it won price increases of between 65 and 71 per cent from its key steel-making customers in Japan, South Korea and Germany.
Mary River has been well known in the mining industry since its initial discovery 46 years ago. In fact, Mr. McCreary even wrote his MBA thesis on the deposit in 1978. But the project languished for years amid low metal prices until Baffinland went public in 2004 with Mr. McCreary at the helm. Since then, the company has spent more $170-million advancing Mary River and increasing the resource base through drilling.
The company is now searching for a financing partner willing to purchase up to 49 per cent of the project, which is expected to produce 18 million tonnes of iron ore a year over a 20-year mine life. It has hired CIBC World Markets Inc. and Citigroup Global Markets Inc. to conduct the process. Mr. McCreary said confidentiality agreements have already been signed with 16 potential partners but that none of the major iron ore producers including Vale, Rio Tinto and BHP Billiton are on the list, because the agreements prohibit them from bidding for the company.
“They all know us and they all know us well. None though have chinned themselves up to sign a confidentiality agreement, because it's got a standstill provision,” he said.
Catherine Gignac, an analyst at Wellington West Capital Markets, said Mary River's high-grade ore is likely to generate strong interest from both steel makers and miners.
“It is the world's largest and best quality there's no question,” she said, adding that if the deposit had been located in a less challenging area such as Brazil, it would have been “mined out completely in the 1970s and '80s.”
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