It’s not often you get to see a two-horse race with more than $10 billion riding on the result, but in Western Australia today that is precisely what’s happening in the iron ore industry.
One of the runners is a faithful old nag called hematite. The other is a colt called magnetite.
Watching on the sidelines are investors uncertain which horse to back, though over the past month signs have been flashing that point to a clear win by hematite – as predicted several times in this column
The latest clue to a hematite win came yesterday when the self-declared new force in iron ore, Fortescue Metals Group, officially withdrew its magnetite entry after a year of mulling about whether to put money on both runners.
The other clue came just before Christmas when Atlas Iron sold two magnetite projects and said it was looking to quit a third, an exit which equated to pushing the horse out of the barn, and slamming the door to make sure it can’t get back in.
Before going too far with the horse analogy, which risks becoming tedious, an explanation and a request are required.
Firstly, the explanation. Hematite and magnetite are both ores of iron. Hematite is the original “dig and deliver” material mined at most WA mines. There are ores with slightly different chemistry which can also be called dig and deliver, but the common thread which makes them viable is a high percentage of iron in the ore, generally around 55%, and sometimes over 60%.
Magnetite is a low-grade ore, generally around 35%, and requires processing for export. It has always been used in steel-making, but generally close to a blast furnace because after the costs associated with processing it struggles to compete with its cheaper relation, even when converted into a high-grade, low impurity, product.
Secondly, the request. Could the magnetite cheer squad resist the temptation to start another letter-writing campaign praising their runner in the iron ore race – let’s just watch the race which is reaching an exciting stage because two magnetite mines are under construction, and a third keen to start.
Sino Iron, wholly Chinese owned, is closest to completion, albeit two years late and $3 billion over budget. Gindalbie’s Karara project is also over budget but not quite so late. Grange Resources is moving towards a final investment decision on its Southdown project near Albany.
If those three projects succeed they will deliver what WA has failed to achieve in 40 years of trying, a way of upgrading poor quality iron ore and the creation of a major value-adding industry.
Pitted against that hope is an list of past value-adding flops (two failed pellet-making plants, a failed hot-briquetting plant, and a failed HIsmelt plant), and now the withdrawal of two successful miners from the expensive business of iron-ore processing.
What Atlas did in December was sell the Balla Balla magnetite (plus vanadium) project to Forge Resources, sell the Yerecoin magnetite project to Cliffs, and confirm that it was looking to sell, or “partner” the Ridley magnetite project.
What Fortescue did yesterday was much the same, albeit on a grander scale. It said it was “evaluating options to partner with third parties” the 3.2 billion tonnes of magnetite it has outlined in a number of deposits, while maintaining a focus “on its direct ship haematite business”.
Interestingly, while both Atlas and Fortescue have said they might take on a partner with their magnetite deposits neither is prepared to sink any money into the processing stage of the business, leaving all of that risk to somebody else.
In effect, Atlas and Fortescue have arrived at exactly the same conclusion as the major iron ore miners, BHP Billiton and Rio Tinto, which have both declined to become involved in magnetite processing.
For investors there is a clear cut choice. Place a bet on the proven haematite exporters and their high profit margins from a simple dig and deliver business.
Or, place a bet on magnetite processing which will boost the WA economy by introducing a value-added solution to previously uneconomic, low-grade ore, and hope that the profits will follow.
For the hematite miners the next few years will see a continuation of strong profits as iron ore prices remain well above their long-term price trend, for now.
For the magnetite hopefuls the next few years will be a continuation of hope, promises, and possible profits, with a successful result becoming a little less likely now that Atlas and Fortescue have sided with BHP Billiton and Rio Tinto to give magnetite a clear thumbs down.