Sunday, September 23, 2012

The Labrador Trough, Canada’s Iron Ore Rush

The Labrador Trough and Canada’s Iron Rush Infographic

 [ Added near the end of February 2015: I broke my rule and invested in a company referred to as "unprofitable." My investment, very small, disappeared completely. Oh well, it was more fun owning LIM than buying a lottery ticket but no more profitable.]

[Add: Feb. 19/2014. LIM may be going down for the count. Iron ore prices are down, the quality of the iron ore from LIM has not lived up to expectations and I have lost so much of my original investment that it may be too late to get out with enough money to even make the trade worth the effort. Oh well, at least my gold mining stock has performed nicely.]

 [Add: Sept. 27, 2012, I bought some LIM. But be aware, this is a dicey play. With iron ore dipping well below $100/t and LIM's break-even point estimated at US$111/t delivered to China, LIM may need an infusion of new funds. I've made my move. Now, to sit tight and wait.]

[Another add: I'm not feeling lucky. Read why: LIM.] 

The following post updated Oct. 3/2012.

I'm always looking for a new investment. My first encounter with LIM (Labrador Iron Mines) immediately peaked my interest. A Canadian company shipping very high iron content ore. Worth investigating, I thought.

Click on map to enlarge.
But, along with peaking my interest, LIM set off lots of personal investment alarms. A ScotiaBank investment report places the LIM investment risk at the "caution warranted" level.

But the promise of a nice return and maybe much more is holding my interest. LIM can be picked up for about 97-cents today. The price fell to under a buck after the October 1 announcement that underwriter Canaccord Genuity Corp. agreed to purchase 30 million common shares at a dollar a share, with an option to buy a further 4.5 million shares.

Analysts I follow are posting a target price in the $1.50 to $3.00 range. The ScotiaBank report, mentioned earlier, has lowered its target value a couple of times since I started following LIM. The ScotiaBank is now predicting $3 based partially on the recent sale of 30 million shares and the resulting share value dilution. Here is a link to a Financial Post article on the recent share sale.

The bottom has literally fallen out of the iron ore market. LIM has been forced to try and stem the financial bleeding. Quoting Mining Business Media:

Just over a week after it put a hold on $60M of capital works programs, the Canadian iron ore producer has ceased the mining of direct rail ore, which was selling at a discount, to focus exclusively on process lump and sinter ore.
 

The company has also shut down its higher cost wet processing plant in favour of the lower-cost dry processing system, which it says is suitable for the ore from the James mine.
 

In response to the market conditions and weaker spot iron ore prices, LIM has scaled back production for the remainder of the 2012 season, reducing its target to 1.7Mt.

Depending upon the forecast you believe, the iron ore market could be down on its luck for months. It may not recover until the second, or even third quarter, of 2013. A prolonged drop in iron ore prices will be hard on the junior mining companies located in the Labrador trough. These producers are at a serious disadvantage to their Australian competition who have much lower shipping costs when it comes to Asia.

With time to decide whether or not to put a little skin in the game, I began to wonder what other potential investment-grade companies are to be found in the Labrador Trough. I found a number and settled on three:

LIM: Labrador Iron Mines Holdings Ltd.
CHM: Champion Iron Mines Ltd.
ADI: Adriana Resources Inc.

Adriana Resources is an exploration-stage company. I read on their website:

"In May 2012, the Company commenced diamond drilling and to date has drilled 48 holes totaling 5,333 metres. Drilling is currently focused on definition drilling to better define the limits of the potential early stage mine pit for mine planing purposes.

"Additional drilling for hydrogeology monitoring wells and further delineation drilling to update inferred mineral resources are planed."

ADI shares closed at 55-cents Friday. The range for the year has been from a low of 49-cents to a high of  $1.38. With iron ore prices as depressed as they are at the moment, it is not surprising that ADI is sitting just above its low for the last 12 months.

Sweetening my interest in ADI was this fact: The Lac Otelnuk property controlled by ADI has the potential to be the largest operating mine in Canada exploiting one of the richest iron deposits in the world.

I also found this of interest, Adriana has secured a joint venture with WISCO (Wuhan Iron and Steel Corporation) giving the important Chinese steel giant a 60% share of the project.

Champion Iron Mines is another exploration and development company focused on developing the iron ore resources in the Labrador Trough running down the border between the provinces of Quebec and Newfoundland / Labrador.

Then there is LIM (Labrador Iron Mines). This company is shipping ore and plans expansion.

So, am I jumping in? Soon. But read what Bloomberg reported Sept. 19, 2012:

Iron ore demand slowed more than half

BHP Billiton Ltd. (BHP), the world’s biggest mining company, said the pace of iron ore demand from China, the biggest importer, has slowed by more than half.

"What we have seen in the past ten years is not only a function of massive demand coming from China but the industry not being prepared," said Alberto Calderon, the Melbourne-based company’s chief commercial officer and manager of its aluminum and nickel business. "This won’t be repeated. Margins will still be good but that scarcity pricing we won’t see again, on average.

"Demand will grow less, although still quite impressively and the producers, in general, are more prepared," said Calderon. "This doesn’t mean that the boom has ended, but it does mean to expect that prices will grow or even stay at very high levels, you would do it at your own peril."

By the middle of the decade the demand for iron ore could even contract as more and more scrap steel is recycled for use in new Chinese construction.

This investment may be a crap shoot.

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