O'Keeffe's Buying Opportunity in the Labrador Trough
Issue 108, December 2014
...in the region is Brian Dalton, founder of Altius Minerals, which has staked vast landholdings across the Trough in the last 10 years, accumulating royalties over Alderon's Kami project and tenements held by both Champion and Rio's IOC.
Dalton and O'Keeffe are thought to have become pals since O'Keeffe's move to Canada, sharing a keen interest in "Les Habitants", Montreal's ice hockey team. Having discovered their respective deposits, Altius also holds equity in both Alderon and Champion Iron.
It may too have an interest in the assets being discarded by Cliffs, with Wabush sitting directly between Kami and Julienne Lake, a multi-billion tonne iron ore deposit currently co-owned by Altius, Labrador's government and an anonymous Chinese consortium.
Like Bloom Lake, Wabush holds critical assets, including direct rail access, surplus housing (a scarce resource in a desolate region) and open-pits that could be used to dump tailings from Kami, Julienne Lake, or both. Dalton is believed to have broached talks with Cliffs' chief executive, Goncalves, but as a royalty company, Altius is unlikely to assume ownership of Wabush itself.
“Where there's a cycle, there's a way out,” one London-based broker says. “The markets will come back,” echoes one New York-based investment banker who is bullish on iron ore. “If it takes 3 years, if it takes 5 years, someone who is truly determined will try and get things going so they are there when the markets return.”
Chinese steel mills have already laid down markers in the Labrador Trough. Hebei Iron & Steel is invested in Kami and Alderon, whilst Wuhan Iron & Steel owns 25 per cent of Bloom Lake, plus equity in juniors in the region, including Century Iron and Adriana Resources.
China's strategic thinking behind the investments, one source who has worked with Hebei says, was to gain off-takes whilst allowing the capital markets to carry the bulk of the funding, but if it opts to make “follow-on bets”, it could now buy whole companies for “cents in the dollar.”
Hebei bought 20 per cent of Alderon and 25 per cent of Kami for $195m in 2012. The entire company now trades at C$40m ($35m).
“What we've got in the Labrador Trough is a unique product that's perfect for blending,” O'Keeffe says. Canada's iron ore lacks the volume of Australia or Brazil and faces greater shipping distances to China, but low impurities mean it fetches a premium in the seaborne market.
Chinese groups are currently “on the sidelines”, but O'Keeffe expects Japanese steel mills to be “active” in the region. “If we can demonstrate that we've got silica levels below 4 per cent, they will love this material, because it's exactly what they chase.”
Japan's Mitsubishi already owns 26 per cent of IOC, which remains profitable at current prices, as do Arcelor's operations in the region, demonstrating the scope for profitability when Canada's iron ore mines have scale and are unencumbered by debt.
The puzzle remains unsolved, but a picture is emerging in which the fragmented pieces of the Labrador Trough are combined into what O'Keeffe terms a “consolidated umbrella.” The lead beneficiaries are also firmly in place.
“I think you really need to be aware of how the market can turn very quickly,” O'Keeffe says. “The good thing for us now is while the market's so dour, we know exactly where we are: it's bad, it can't get much worse, or everyone will be out of business, so you can really get yourself set.”
Shares in Champion last traded at A$0.17, valuing the company at A$34m ($29m).
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