Junior Miners Tapping into the West African Iron Ore Boom

West Africa is on the verge of becoming one of the world’s leading iron ore regions, and junior mining firms feel they could hold the key to the area’s success.

By 2020, West African nations, including Guinea, Sierra Leone, Liberia, and the Republic of the Congo, could supply 250 million tons, or 9 percent of the world’s total iron ore production, according to mining research firm Raw Materials Group.

That’s why both major and junior mining companies have been making big investments in West Africa over the last few years, fueling a mining boom that some think could turn the region into the next Pilbara, the iron ore heartland of Australia.

Big projects are set to start production

Right now, the iron ore market is highly concentrated, with two nations, Brazil and Australia, each accounting for about a third of global exports. Similarly, global iron ore production is dominated by three major mining companies: Rio Tinto (NYSE:RIO,LSE:RIO,ASX:RIO), BHP Billiton (NYSE:BHP,LSE:BLT,ASX:BHP) and Vale (NYSE:VALE).

All three majors are active in West Africa. A landmark project in the region is the massive Simandou development, located in Southeast Guinea. Simandou is a joint venture between Rio Tinto and Chalco, a subsidiary of Chinese state-owned aluminum producer Chinalco. Rio Tinto holds a 50.35 percent stake in the project, and Chalco owns 44.65 percent. International Finance Corporation, the private sector arm of the World Bank, owns the remaining 5 percent.

According to Rio Tinto, Simandou is the largest iron ore and infrastructure project ever developed on the continent. The partners expect the mine to produce 95 million tonnes of iron ore a year when it starts up in 2015. The project also involves the construction of a 650-kilometer railway and a new deepwater port south of Conakry, the capital of Guinea.

Rio Tinto has pegged the total cost of the project – including the railroad and port – at around $10 billion.

China gets in on the action

Simandou highlights another trend that is driving the development of West Africa’s iron ore industry: the growing participation of Chinese companies.

China is already a major iron ore producer. Last year, it mined 1.33 billion tons of ore. However, at roughly 20 percent iron, its iron ore is relatively low grade. At the same time, the country is the world’s most voracious iron ore consumer, importing 686 million tons of iron ore in 2011.

As a result, China’s domestic production falls short of the amount of iron it needs to fuel its ongoing development.

That is prompting the country’s mining firms to aggressively move into new markets like West Africa in a bid to meet the Chinese government’s goal of securing an additional 250 million tons of iron ore annually.

A very recent example of Chinese participation can be seen in Guinea’s first operating iron mine, which will start up on June 30.

The mine cost $300 million to build and is expected to produce 10 million tonnes of ore per year when it reaches full capacity. It is operated by the Guinea Development Corporation, a joint venture between the government of Guinea, the China International Fund (CIF), and Bellzone Mining (LSE:BZM). The Guinean government owns 15 percent and Bellzone and CIF own 42.5 percent each.

Why junior miners are bullish on West Africa

But even with the influx of investment from major producers and Chinese companies – not to mention worrying headlines about weaker iron ore demand due to the Eurozone debt crisis and Chinese economic slowdown – junior miners still see lots of opportunity in the region.

In fact, some think these near-term worries will put pressure on majors to delay investing in new projects that many of their investors see as too risky. That could be a plus for juniors, according to John Welborn, CEO of Equatorial Resources (ASX:EQX).

“Africa represents an opportunity to get a foothold in a commodity that has been dominated … by a small number of companies,” Welborn said. “Copper has dozens of producers; iron ore has basically three. If those three change their investment strategy, that creates opportunity.”

Equatorial owns two iron projects in the Republic of the Congo. The company says its Badondo property could contain between 1.3 and 2.2 billion tonnes of ore grading 30 to 65 percent iron. Equatorial is also drilling at its Mayoko-Moussondji project further north, with a goal of providing an initial metal estimate by mid-2012.

Here are two other junior iron ore firms that are currently active in West Africa:

  • West African Iron Ore (TSXV:WAI) is exploring for iron ore at its Forécariah and Kérouané properties in Guinea. The company has not yet defined a resource, but says that Soviet geologists explored Forécariah in the early 1970s and estimated that the property could contain 750 million tonnes of ore.
  • Sable Mining Africa (LSE:SBLM) owns the 308 square kilometer Bopulu licence, the 349 square kilometer Timbo licence, and the 532 square kilometer Kpo Range concession. All three are located in Liberia near iron-ore-bearing properties owned by major producers ArcelorMittal (NYSE:MT) and Russia-based Severstal (LSE:SVST).

Cost control is key to junior success

Juniors’ long-term prospects are still unclear. West Africa continues to have strong long-term potential, but smaller producers face a number of hurdles. In addition to the usual challenges of finding a mineable deposit, costs for other necessities, such as labor and equipment, are rising.

The biggest obstacle that juniors face is the high cost of building infrastructure. Often, crucial links such as roads, railways, and ports have to be built from scratch, and many juniors simply don’t have access to the capital these projects require.

In addition, though many West African countries are becoming friendlier to foreign mining interests, many are still unstable, which adds to uncertainty.

Still, many juniors feel that if they can keep operating costs low – between $20 and $40 a tonne – they will remain profitable even if market conditions remain weak.

 

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.