Magnetite players push fledgling status to government, and value to steel sector

PERHAPS no other sector of the Australian mining industry finds itself quite so precariously balanced on the tightrope stretched taut by global demand over a deep pit of uncertainties than magnetite iron ore.

While much maligned and misunderstood in Western Australia due to its lack of operating history in this state, those involved with the mineral see magnetite as an important part of iron ore’s future – supplementing falling quality of hematite iron ore.

However, the comparatively high cost of developing and running a magnetite operation makes the case for investment all that much tougher in the current global environment, especially with the twin costs of a mining and carbon tax eroding the margin created by a pricing premium.

This appears to have created the need for additional caution in the sector, especially as cost blowouts at the two most advanced projects have given further ammunition to sceptics.

CITIC Pacific’s Sino Iron project at Cape Preston is the state’s biggest and most advanced magnetite project. It has been dogged by rising costs and delays, with the most recent announcement from the Hong Kong-listed proponent flagging an additional $US900 million and exports commencing some time before June 30.

While CITIC Pacific has yet to formally agree with the variation requested by its Chinese-owned head contractor MCC, its likely the final price will be at least $6.1 billion, up from $4.7 billion when it started in 2007.

Gindalbie Metals and AnSteel’s 50:50 Karara joint venture has also suffered from cost rises but, like CITIC Pacific, the project is well past the point of no return and is set to export 8 million tonnes per annum of high-grade magnetite concentrate, along with 2mtpa of hematite ore.

Both these projects hit the starter’s gun early with fast-track moves to get into production sooner rather than later. Both have encountered unexpected hurdles in development, not to mention having the additional ongoing costs of new taxes thrust upon them after they had decided to go ahead.

As a result, the next two potential cabs off the magnetite rank are more reserved.

Cautious approach

Grange Resources CEO Russell Clark is positive about his company’s $2.6 billion Southdown project near Albany, which has been through an advanced pre-feasibility study, with a bankable feasibility study expected to be completed in the first quarter of 2012 at the latest.

“We are moving as quickly as possible,” Mr Clark said. “Having said that, we will not commit to this project until we have the fundamental building blocks in place.

“A number of projects have blown out because they were fast-tracked and did not have their approvals in place.

“We want to take out some of the variables which can cause blowouts.”

Among the big-ticket items Mr Clark has yet to finalise is the source of power for Southdown’s energy-hungry processing plant. The operation will need a 180-megawatt power plant driven either by electricity via an extended transmission line from Collie or by gas from an addition to the gas pipeline, which currently stops at Bunbury.

The former option has fewer risks for Grange at this stage.

Grange is also still hoping to negotiate a moratorium period for royalties, which, at 5 per cent per year, will cost it $50 million. Mr Clarke said the company was seeking some form of recognition for the costs it would incur such as improving energy access for the region and deepening the port.

“We are hoping the government recognises this is a fledgling industry,” Mr Clark told WA Business News.

Asia Iron Australia managing director Bill Mackenzie has taken a similar approach to the group’s Extension Hill project near Geraldton, which is projected to cost in the order of $2.5 billion, or as much as $3 billion if working capital is included.

Mr Mackenzie said final investment decision was due in the first quarter of the 2012 calendar year after a detailed engineering study was due to be completed by WorleyParsons.

However, he said the company’s approach was not to start with too many loose ends.

“That is when you start getting changes in scope which are the expensive ones,” Mr Mackenzie said.

Distinct difference

The Asia Iron boss also chairs the Magnetite Network, an industry body representing the growing band of players in this space, albeit most at the early stages of development. Its latest member, for instance, is Iron Ore Holdings, which has magnetite tenements near the Devil Creek domestic gas project near Cape Preston.

MagNet, as the body is called, lists 23 projects mainly focused on the Pilbara and Mid West but extending east into the northern Goldfields from Crosslands’ Jack Hills and Emergent Resources’ Beyondie projects down to Norseman where Matsa Resources has tenements.

Speaking for the whole sector, Mr Mackenzie said that magnetite interest was coming from integrated steel players, which are used to having equity in the commodity, especially the Chinese mills that have historically used domestic ore.

He said due to falling grades and purity of hematite, magnetite concentrate is becoming more important in the steel equation just as traditional sources are drying up. 

Mr Mackenzie also backs the Chamber of Minerals & Energy view that it is not just the Chinese that are interested or will need magnetite.

“Grange has Sojitz (which is Japanese) as a partner, so it is not right to say it is purely Chinese money,” Mr Mackenzie said.

While there may be growing interest from other nations there is still a distinct difference between those in advanced stages of developing magnetite and their cousins in haematite.

Of the leading four proponents only one, Karara, has a small but significant hematite link, with about 20 per cent of its first stage production due to be direct shipping ore. That part of the operation has already commenced production.

Another advanced project, Crosslands’ Jack Hills, also already has a hematite mine.  But much of the site’s resource has turned out to be magnetite which, according to a recently released feasibility study, has pushed the cost of the Jack Hills mine expansion to $3.7 billion, a level of spending which cannot be met through existing arrangements between partners Murchison Metals and Mitsubishi.

Fortescue Metals Group stated only recently that it was considering a spin-off of its magnetite assets in a Hong Kong float. Atlas Iron has not been quite so blunt, announcing that it is seeking investors for a share in its three magnetite projects.

Extension Hill is an early example of this seeming divergence between the two ores. Mount Gibson Iron sold out of the magnetite part of the deposit long ago but retained the hematite rights.

The fact that magnetite projects are separate from most existing iron ore operations or distinct from their core business may well be part of the reason why they have been hard-pressed to make their case against inclusion in both the mining tax and carbon tax.

While the Minerals Resource Rent Tax operates before the main processing in magnetite, at which point the ore has little value, there is still uncertainty and administrative expense in its management.

The carbon tax is more problematic.

In a recent statement to shareholders, CITIC Pacific chairman Chang Zhenming said his company was involved in lobbying efforts regarding both these taxes.

“Magnetite iron ore produces more carbon in Australia but less when used in steel making; therefore, there is a net reduction in carbon emissions in the overall mine-to-steel value chain,” Mr Chang said.

“We are working closely with other magnetite iron ore producers to lobby the government for an appropriate level of assistance that recognises the benefits of this new and upcoming industry in terms of creating jobs in Australia and producing carbon savings across the globe.”