Iron

By Kishori Krishnan Exclusive To Iron Investing News

Shares in WA’s mid-west iron ore miners and explorers lifted after the Federal Government committed $339 million towards the $4 billion Oakajee port. The government matched funding offered by the WA state government in its 2009/10 federal budget handed down on Tuesday, bringing the total government commitment to $678 million.

Murchison Metals Ltd  (ASX: MMX) executive chairman Paul Kopejtka said the federal government’s commitment represented “a powerful vote of confidence in the Oakajee project and underlines the importance of this major infrastructure development to Australia’s future economic growth”.

Murchison and Japan’s Mitsubishi (TYO: 8058) won the tender in July last year to develop the port through its joint venture company, Oakajee Port and Rail (OPR). Gindalbie Metals Ltd and Karara project partner Anshan Iron and Steel Group Corporation will be a foundation customer of the new common-user deepwater port near Geraldton.

Golden West Resources Ltd,  (ASX:GWR) another potential foundation user, jumped 4.5 cents, or nine per cent, to 54.5 cents on Tuesday. OPR said it had “opened commercial, operational and technical discussions with a wide range of Oakajee stakeholders including mid-west miners and potential Chinese participants” since March. The talks followed OPR’s signing of a State Development Agreement underpinning the project with the WA government.

“A project bankable feasibility study is scheduled for completion in March 2010,” OPR said. “This is expected to be followed by financial close in late 2010, at which stage federal and state government funding will be required.” OPR said WA Premier Colin Barnett had indicated Oakajee was potentially the state’s single-most important economic development project over the next 50 years. OPR chief executive Christopher Eves said the combined government backing was “unprecedented support for a major Australian infrastructure development” and provided “a massive boost. It indicates the widespread support for this project in Australia,” Mr Eves said.

New launch

Icap, the London-based inter-dealer broker, said on Wednesday, it was launching a new brokerage service for iron ore derivatives, a further signal of the rapidly changing market from the traditional annual price negotiations to spot pricing. Icap’s move comes just a year after Deutsche Bank and Credit Suisse  (NYSE: CS) created the first cash-settled iron ore swaps, a financial product that allows miners, steelmakers and investors to bet on the price of the mineral and settle financially.

The derivatives iron ore market has gained momentum as mining executives acknowledge openly that the traditional system of annual talks – known as the benchmark – to settle prices for the input to steel is breaking down. The secretive negotiations are between Vale of Brazil, Rio Tinto and BHP Billiton  (ASX: BHP) and the steelmakers, led by Baosteel and the China Iron and Steel Association.

Traders said spot prices – physical and derivates – could gain further importance if miners and steelmakers fail to reach an agreement for the 2009-10 prices, after missing an April 1 deadline. They said the possibility of a failure was growing.

The likelihood of a structural change to price iron ore sales based on spot prices rather than annual settlements comes as other banks, including Morgan Stanley, joins Deutsche Bank and Credit Suisse in offering cash-settle iron ore swaps. Other brokerages, including Freight Investors Services and London Dry Bulk have also expanded their business from coal and freight into iron ore swaps.

Paul Newman, Icap’s managing director, said in a statement that the physical transactions being observed in today’s iron ore market offered interesting opportunities. “Icap has proven its ability to build derivative liquidity and transparency in emerging asset classes,” he said.

The derivatives market has been boosted after LCH.Clearnet, Europe’s largest independent clearing house, and Singapore Exchange, announced that they would clear the swaps. The move is important because until now, buyers and sellers of the private, bilateral over the counter swaps bore the risk of their counterparties defaulting, deterring some potential participants.

Shares down

Consolidated Thompson Iron Mines Ltd. (TSX:CLM) said Tuesday it could be forced to postpone completion of the Bloom Lake iron ore project in northeastern Quebec if a financing deal with a Chinese company falls through, but the chances of this happening are small. The company said it has sufficient funds from a $92.7 million public offering of its shares in April, to continue construction at the current pace until July.

But there’s a possibility the work will have to stop if Consolidated Thompson doesn’t complete a definitive agreement for China-based Wuhan Iron and Steel (Group) Corp., or Wisco, to invest US$240 million in the Toronto-based company’s stock and in a related entity. As of March 31, Consolidated Thompson had spent approximately $219.8 million on Bloom Lake.

“The expected proceeds from the public offering and the WISCO agreement are expected to provide the company with the required financing to complete the construction of the Bloom Lake mine; however, there is no assurance that the WISCO transaction … will be successful,” the company stated in its quarterly results. Consolidated Thompson president and CEO Richard Quesnel said the chances of the WISCO deal falling through are “very low. We’re advancing quite well in our discussions,” Quesnel said in an interview Tuesday. “We expect that June 1 should be the target date (to reach an agreement), and we’re confident in that respect.”

The two companies signed a letter of agreement in March under which Wuhan will receive 29.7 million shares in the company and a 25 per cent interest in a new entity that will be established to operate Bloom Lake.

Demand down

Demand for iron ore, used in the production of steel, has slumped because of the worldwide recession, which has affected demand for everything from new buildings and vehicles to appliances. Steel production and prices, which reached all-time highs last year, have dropped to their lowest levels in a quarter century in recent months. This has forced the closure of major steel operations in Canada.

In early March, United States Steel Corp. (NYSE:X) said it would indefinitely idle operations in Hamilton and Nanticoke, Ont., putting 1,500 people out of work. This came after the company closed its Hamilton blast furnace in November, laying off 700 employees.

And other steelmakers such as the former Algoma Steel, Ipsco, Arcelor Mittal (AMS: MT)  Dofasco and distributor Russel Metals (TSX:RUS) have cut jobs and streamlined operations to deal with the industry downturn.

Iron ore producers have been affected as well. In November, the Iron Ore Company of Canada said it would review plans for an $800-million expansion of its operations in Labrador City and would also reduce production at its plants.

And ArcelorMittal Mines Canada said last week it plans a four-week production stoppage at its open pit iron mine in northeastern Quebec and a related pellet plant, and some 1,800 workers will be laid off for the summer after an iron-producing subsidiary of Rio Tinto Plc (NYSE:RTP) announced plans to close a Quebec metallurgical complex and mine because of uncertainty in the markets.