The $1.1-billion purchase of a stake in ArcelorMittal (MT)’s Canadian iron-ore unit by China Steel Corp. (2002) and Posco increased interest in Canada’s ability to meet Asian demand for the steelmaking raw material.
Champion Iron Ore Mines Ltd., Alderon Iron Ore Corp. (ADV) and Labrador Iron Mines Holdings Ltd. (LIM) surged yesterday in Toronto after Taiwan’s China Steel and South Korea’s Posco led a group that agreed to buy 15 percent of ArcelorMittal Mines Canada Inc.
The deal, the second-biggest in the Canadian iron-ore industry, gives the Asian steelmakers’ group access to deposits generating about 40 percent of the country’s production of the commodity, Luxembourg-based ArcelorMittal said on its website.
“It shows you that Canada is an important iron-ore producer and you’ve got foreign buyers demonstrating an interest in the product that we have, the infrastructure and the risks involved in operating here,” said Wojtek Nowak, a Toronto-based analyst at Fraser Mackenzie Ltd.
Canada is positioning itself as a source of shipments to compete with Australia and Brazil, the world’s two largest iron- ore exporters. Canada’s Champion (CHM), Alderon and Labrador Iron plan to capitalize on the country’s supply of skilled labor and its lower political risk compared with rival iron-ore regions such as West Africa.
ArcelorMittal, Champion and Alderon have projects in the so-called Labrador Trough, a geological region straddling northern Quebec and neighboring Labrador.
Champion, which rose 17 percent in Toronto yesterday, had slumped 54 percent in 2012. Alderon, which gained 8 percent, dropped 34 percent last year. Labrador Iron, up 32 percent yesterday, plunged 78 percent in 2012.
The ArcelorMittal transaction creates a floor for iron-ore assets, William Frohnhoefer, New York-based analyst at BTIG LLC, said yesterday by telephone.
“The dynamics coming into play are not necessarily related to the current spot price but long-term supply for guys who are not in home markets that are conducive to quality long-term iron-ore supply,” he said.
Iron ore delivered at China’s Tianjin port, a global benchmark price, slumped as much as 37 percent in 2012, according to data from The Steel Index. It touched $86.70 a ton on Sept. 5, the lowest in more than two years, as China’s economic growth slowed, before rallying in December as confidence mounted that growth will accelerate.
The price was $144.90 yesterday. Shipments of iron ore to China are likely to rise after inventories at local ports fell to the lowest since 2010, Arctic Securities ASA said yesterday.
“The trend is strengthening with higher prices and tighter supply,” said Laurence Balter, an analyst at Oracle Investment Research in Fox Island, Washington. “Cash-rich buyers hooking up with debt-laden producers is a matrimony made in heaven.”
The ArcelorMittal deal “is a market validation of the Labrador Trough,” said Rodney Cooper, president and chief operating officer at Labrador Iron, whose James mine began full production in April. “It indicates there are still large global players who are aware of the Labrador Trough and willing to invest significant amounts.”
Messages left with Champion and calls to ArcelorMittal’s office in Montreal weren’t immediately returned.
Cooper says his company is talking with non-Canadian firms, including steelmakers, who have a “very strong” interest in forging supply agreements.
Asian steelmakers are already active in Canada with the objective of securing iron ore. India’s Tata Steel Ltd. (TATA) is working with Calgary-based New Millennium Capital Corp. to develop iron-ore deposits in Quebec and Labrador.
China’s Hebei Iron & Steel Group Co. Ltd. acquired a 20 percent stake in Alderon in April for C$194 million ($197 million). Hebei said at the time it will get most of the output from Alderon’s Kami project as part of the deal.
The Vancouver-based company is in discussions with steelmakers in Japan, Korea and Taiwan as well as traders in Europe for the remaining 40 percent of Kami’s production, Alderon Chief Executive Officer Tayfun Eldem said in a telephone interview from Montreal.
The ArcelorMittal deal “bodes really well for the region and confirms the continued interest by particularly investors from the Far East” he said.
In 2011, ArcelorMittal and Nunavut Iron Ore Acquisition Inc. agreed to pay about C$590 million to buy Canada’s Baffinland Iron Mines Corp. That gave ArcelorMittal control of the Mary River iron-ore project on Baffin Island, about 600 miles northwest of Iqaluit, the capital of Nunavut.
Last month ArcelorMittal reduced its stake in Mary River to 50 percent from 70 percent, though the company will remain the project’s operator, according to a Dec. 13 statement.
Canada was the ninth-biggest producer of iron ore in 2011 with 37 million tons, according to U.S. Geological Survey data. China, the No. 1 steelmaker, was the largest miner with 1.2 billion. In terms of so-called crude ore reserves, Canada is sixth, behind Australia, Brazil, Russia, China and India, the data show.
In Quebec, Canada’s largest iron-ore-producing province, ArcelorMittal’s Mont-Wright complex yields about 15 million tons a year. The company plans to double output there, according to a presentation on its website. ArcelorMittal is developing deposits at Mont-Reed and Fire Lake, which also are in Quebec and within the Labrador Trough.
ArcelorMittal, the world’s largest steelmaker, was created in 2006 when billionaire Lakshmi Mittal’s Mittal Steel Co. acquired Arcelor SA in the industry’s largest takeover. The company has added mining assets since then in Canada, Brazil, Russia and Liberia as part of a strategy to increase its raw materials self-sufficiency. Its goal is to produce 84 million tons of iron-ore annually by 2015.
The company is selling the stake in the iron-ore unit to help reduce debt after Standard & Poor’s cut its rating on the steelmaker to junk level in August. ArcelorMittal has already slashed its dividend and moved output to cheaper sites.
For China Steel and Posco (005490), the deal helps them diversify their sources of high-quality ore, which tends to contain fewer impurities such as silica and phosphorous, Fraser Mackenzie’s Nowak said.
“The bulk of iron ore on the seaborne market is coming out of Australia and Brazil and it tends to be a higher percentage iron coming out of the ground, but that is starting to decrease over time,” he said.
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