Another Chinese steel giant flexes muscle in Labrador Trough

Hebei Iron & Steel is the latest to strike a deal in the Labrador Trough, an iron ore jurisdiction in Canada that is luring Chinese interest, announcing a C$194m purchase agreement with Alderon

Author: Kip Keen
Posted: Friday , 13 Apr 2012
http://www.mineweb.com/mineweb/view/mineweb/en/page66?oid=149290&sn=Detail&pid=92730

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Analysts have said China wants to diversify away from the big three iron ore producers that command most of the seaborne iron ore trade, striking its own deals on iron ore projects around the world. In Canada the iron ore play that is becoming the go-to place for the Chinese is the increasingly prospective Labrador Trough. Rich in iron deposits, it runs for hundreds of kilometres through much of northeastern Quebec and western Labrador.

That appetite for diversification was on display Friday. Chinese steel-giant Hebei Iron & Steel and Canadian junior Alderon Iron Ore (TSX: ADV) announced a deal that has Hebei, reportedly China's largest steel producer, buying a 19.9-percent stake in Alderon and a 25-percent interest in its chief iron ore asset, the Kami project in the Labrador Trough. If the deal goes through, Hebei will get two seats on the Alderon board.

Hebei Chairman Wang Yifang danced around the theme of diversifying China's iron ore interests around the world in a prepared statement. "I believe this is an important transaction in the push of China's iron and steel enterprises to invest into overseas mining assets," stated Yifang. "In addition to the potentially attractive investment returns, Hebei is able to lock up a long term supply of high-quality iron ores, to help improve our operational performance and ensure our long-term, sustainable growth."

In total, the two-part agreement is worth C$194 million: Hebei gets 25.8 million Alderon shares for C$88.2 million and a 25-percent interest in a subsidiary company that will own the Kami project for the C$106 million balance. Hebei also gets a 60-percent offtake agreement, at market prices set by Platts, on production from the Kami project up to 4.8-million tonnes of iron ore a year. Meanwhile, Alderon said Liberty Metals and Mining Holdings, which owns 15 percent of Alderon stock, would keep its shareholding at 15 percent per a pre-emptive right, buying 3.8 million shares for C$13 milllion in proceeds to Alderon.

In the Labrador Trough Hebei joins Wuhan Iron & Steel, reportedly China's third-largest steel producer, as it also pursues early- to advanced-stage iron ore projects through several juniors, including Adriana Resources and Century Iron Mines. Recent comments by Scotiabank commodities analyst Patricia Mohr on Wuhan's activity in the Labrador Trough now apply to Hebei as well.

"China's third-largest steel producer (Wuhan Iron and Steel) has equity interests in three mining ventures in the Labrador Trough - likely spurred by high-quality ore and a desire to diversify supply sources away from the three large mining companies that currently dominate over 80 percent of world seaborne trade," wrote Mohr in a February 28 update on the Scotiabank Commodity Index.

In an email about those comments Mohr agreed such diversification was again at play. She then characterized the Labrador Trough as "a fast-developing new play in iron ore."

Meanwhile, the Hebei-Alderon agreement must still clear a major hurdle: the blessing of the Chinese government. But if recent bureaucratic rubber stamping with Wuhan is a guide, then there is reason to believe the Alderon financing has a good chance of being given the go-ahead. Adriana closed its C$91 million financing and joint venture agreement with Wuhan about a month after announcing it late last year.

To ensure it does not languish overly long in the grips of government red tape, Alderon said it can terminate the deal after 90 days if state approvals do not come through. It also agreed with Hebei that it won't look for alternatives to the deal for 75 days.

Assuming it goes ahead, Alderon will obviously bring in a considerable pot of cash as it moves to complete a feasibility study of the Kami project. This is to build on a recent scoping study in which Alderon outlined Kami as an eight-million tonne per year operation with a 15-year mine life and a $989 million capital cost. Alderon estimated a three-year payback and a $3-billion net present value discounted at eight percent.

But Alderon, as it pushes ahead with feasibility work, has said it plans to look at Kami as a much larger, 16-million tonne per year operation. Notably, were it to go the route of more production, then Hebei would not automatically reap the offtake benefits of the added tonnage, as its quota on concentrate is capped at 4.8 million tonnes a year.

The immediate impact of the announcement is clear: it gives Alderon a huge boost in confidence that it will be able to pull off the Kami project. Dundee analyst David Talbot noted in a briefing to clients Friday that the Hebei agreement reduced risk as regards project financing and off-take.

It also brings on board a "partner with deep pockets," Talbot said.