Iron-Ore Miners Strive to Avoid Past Mistakes as Prices Boom

Iron-ore’s record prices are encouraging a wave of investment in mining ventures, with companies hoping to avoid a repeat of the previous boom a decade ago that ended in multiple pit closures and abandoned developments.

Chinese companies are pushing to build one of the world’s biggest mines in West Africa, while a clutch of smaller companies are developing new mines in Australia or reopening mothballed pits idled years ago when prices were low. Many are betting that demand for iron ore, used to make steel, will remain buoyant as governments world-wide inject billions of dollars into their economies.

The benchmark iron-ore price rose to a record $233.10 a metric ton this month, according to data from S&P Global Platts, as China’s steel industry cranked up output. The rally mirrors gains in prices of commodities, including copper and crude oil, which are also in demand as the global economic recovery from the Covid-19 pandemic gathers pace.

New iron-ore entrants see an opportunity to thrive because the industry’s biggest producers are behaving differently than a decade ago.

BHP Group Ltd. BHP 2.46% and Rio Tinto RIO 3.47% PLC, the world’s two largest mining companies, say they aren’t interested in producing much more iron ore in Australia, which accounts for more than half the world’s trade in the commodity. The pair’s current investments, which are still worth billions of dollars, aim to replace output from older pits, and they expect better demand growth in commodities like copper.

Another major iron-ore producer, Brazil’s Vale SA, is working to rebuild production following two deadly spills from dams storing mining waste. The big Western miners have also faced pressure to increase dividends to shareholders after splurging on deals and big projects across several commodities during the previous boom that were later written down by billions of dollars.

The previous boom exposed the risks of investing in underdeveloped areas. Many companies that raised billions of dollars to build mines, often in new iron-ore regions that lacked the rail and other infrastructure needed to make the projects viable, never produced a single ton of ore.

Few places illustrate the boom-to-bust commodity cycle more than the Bloom Lake operation in Canada. In 2011, when iron-ore prices previously surged to a record high, Cleveland-Cliffs Inc. paid roughly 4.9 billion Canadian dollars, the equivalent of $4.1 billion today, to buy Bloom Lake. When prices went into free fall five years later, the U.S. miner closed the pit and accepted an offer of C$10.5 million to get rid of it.

Today, investment is again flowing into Bloom Lake. The mine’s current owner, Champion Iron Ltd. CIA -3.79% , restarted production in 2018 and is spending C$589.8 million on doubling the mine’s annual output capacity to 15 million tons of iron ore. The company is contemplating a further expansion and recently bought another iron-ore deposit nearby.

Champion Iron, which this week reported a fivefold increase in annual profit, wants to sell more iron ore to U.S. steel mills and less to China, a different strategy than pursued by Cleveland-Cliffs a decade earlier. The company is also producing more of a high-grade 67.6% concentrate that can be used by electric arc furnaces to supplement scrap and can be sold at a premium.

Today, investment is again flowing into Champion Iron’s Bloom Lake operation in Canada, seen in 2016.

Photo: staff/Reuters

“I want us to have a product diversification [because] when the market does turn, it could cause us a problem,” said Michael O’Keeffe, executive chairman of Champion Iron.

Mindful of not repeating past mistakes, many aspiring iron-ore companies are targeting small projects that can start up quickly and be developed in stages. To keep upfront costs down, they are relying on trucks rather than building rail lines to transport ore.

“We’re seeing new entrants enter into flexible mining and infrastructure arrangements that enable mines to close without financial penalty if prices fall below their break-even point,” said Rohan Kendall, analyst at consulting firm Wood Mackenzie.

The consulting firm estimates 20 new mines with a total annual capacity of 150 million tons will start this year—excluding any in China—a five-year high in capacity terms. Last year, just 5 million tons of capacity was added, down from 14 million tons in 2019.

Iron ore has seen a bigger rush of new entrants than many other mined commodities—which have also been rallying—largely because companies don’t need massive amounts of cash upfront for mine-site infrastructure as with metals like copper. Deposits are relatively abundant and easy to mine, scraped off the Earth’s surface, crushed and hauled to port for shipping.

But whether an iron-ore mine can survive a downturn in prices ultimately comes down to costs, Mr. Kendall said.

BHP and Rio Tinto benefit from owning existing railways and port infrastructure, making them more resilient to a deep downturn in prices. In 2020, Rio Tinto had an underlying profit margin of 74% on Australian iron ore that fetched an average $98.90 a ton.

Rio Tinto is facing a decision on whether to help develop Guinea’s Simandou iron-ore deposit, in which it owns a stake. Chinese companies are pushing to develop Simandou’s ore, which would require a 400-mile railway to the coast. However, the deposit is so big that some analysts think development could cut long-term prices of iron ore by more than 10%, threatening to make Rio Tinto’s operations in Australia and Canada less profitable.

Many analysts think iron-ore prices will fall soon. Capital Economics expects them to drop to $140 a ton by year’s end. A repeat of the previous mining investment boom is unlikely, partly because miners will be mindful of China’s plans to curb carbon emissions in steelmaking, it says.

Eduardo Bartolomeo, Vale’s chief executive, expects this iron-ore cycle will be different because the previous one was underpinned by a demand shock from China’s urbanization.

“What we see now is a very heated market that we call ‘stronger for longer,’” he said. “We will bring back supply, but we don’t believe the market will soften in the next two years.”


What’s your take on investing in iron-ore ventures or other commodities? Join the conversation below.

Write to Rhiannon Hoyle at

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


Leave a Reply

Your email address will not be published. Required fields are marked *

scroll to top