FEATURE: Who’s in and who’s out of West African iron ore?

The past 12 months have seen a fundamental realignment of West Africa’s iron ore sector.

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A prolonged depression in iron ore prices, which saw the steelmaking raw material lose half its value in 2014, put enormous pressure on the region’s burgeoning iron ore industry, culling high-cost producers and compelling mining majors to reconsider their positions in the region.

Did the fall in iron ore prices come as a surprise? Analysts, traders, producers and consumers all knew that a new wave of supply would become available in 2014, pushing down prices and changing the balance of the market, which for years had been tipped in miners’ favour as China raced to grow and its appetite for steelmaking raw materials boomed.

But the speed at which global prices fell, from more than $130 per tonne at the end of 2013 – a level at which most miners, even higher cost producers, could still maintain a healthy margin – to less than $66 per tonne in mid-December 2014 shocked even the industry’s most securely established participants.

Last year also cast a second, unexpected shadow over the region. In the early months of 2014, rumours emerged of a strange, virulent and fatal disease in the forested south-eastern corner of Guinea, which borders Liberia and Sierra Leone and is home to some of the region’s richest iron ore deposits.

The disease was confirmed as ebola, the haemorrhagic fever with a fatality rate as high as 90%, and for which there is no known cure.

Despite the proximity of the outbreak to a number of major project sites, the disease barely registered for miners in the region in the first half of 2014.

Global medical charities and non-governmental organisations, including Medecins Sans Frontieres and the World Health Organization, moved in but reports indicated that the disease was largely contained – until it spread over the borders to Liberia and Sierra Leone and new outbreaks of the disease were confirmed in May and June.

The second wave of the disease did affect miners. As reports emerged of cases multiplying into the thousands and death tolls rising rapidly, the equity values of iron ore miners in the affected region, already battered by the weakening iron ore price and wavering Chinese demand, were hit hard.

In August 2014, steel giant ArcelorMittal announced that contractors working on the second phase of its Yekepa iron ore project in Liberia, a massive $1.7 billion expansion scheme, had downed tools and declared force majeure because of the the worsening health situation in the country.

It emerged that an ArcelorMittal public health official had, while travelling on non-company business, transmitted the disease to Nigeria, Africa’s biggest economy.

No other deaths or cases of the disease have been reported among ArcelorMittal’s Liberia workforce and, almost miraculously, the company continues to produce and export iron ore from its 5 million-tpy phase 1 operations at Yekepa.

ArcelorMittal was one of the first major investors in West African iron ore in the aftermath of a bloody conflict which left thousands dead across Liberia and Sierra Leone in the 1990s and early 2000s.

Buying up the historical iron ore assets of the Liberian American Swedish Minerals Co (Lamco) in 2006, the steelmaker redeveloped the mine and started shipping ore to customers in Europe and China, including its own mills.

The steelmaker further cemented its ambitions for the region last year when it emerged that it was looking to buy a majority stake in BHP Billiton’s high-grade Euronimba project just across the border in Guinea.

BHP’s sale of its stake in Euronimba represented its withdrawal from iron ore in the region. The miner has been ramping up its iron ore operations in Australia in a race to secure the lowest possible costs for its output, stepping away from expensive greenfield operations in more remote locations.

Although its expansion project is on hold for the time being, ArcelorMittal has emerged in the past year as perhaps the largest active investor in iron ore in West Africa.

With an operating mine, insulated to some degree from the sharp decline in iron ore prices by its ability to sell ore to its own mills, and a big enough balance sheet to contemplate further investments in the region, its achievements have outstripped those of Rio Tinto across the border in Guinea, despite the grander scale and scope of the Anglo-Australian mining major’s project – the almost infamous Simandou iron ore mine.

The Simandou mine, subject of much controversy in recent years, remains undeveloped, despite Rio Tinto having held the rights to mine the project for more than 20 years.

Last year, a landmark investment agreement for the project was signed by Rio Tinto and the Guinean government, outlining the fiscal framework for Rio’s half of the $20 billion project, which boasts millions of tonnes of high-grade iron ore.

The agreement has put in place a timeline for the development of the project, with first production now pencilled in for 2018, back from earlier estimates of 2015.

But many in the market believe that the complexities involved in building and financing the 650km railway planned to link the mine to the seaborne market, coupled with effects of depressed global iron ore prices, will push back the date of first production into the 2020s.

Greater uncertainty clouds the fate of the other half of the Simandou project. Stripped from Rio Tinto in 2008, the mining licence to blocks 1 and 2 of the project was controversially granted to BSG Resources, the mining arm of Israeli diamond billionaire Beny Steinmetz’s group of companies.

BSG Resources sold on a 50% stake in its half of the project to Brazilian mining giant Vale in 2010 for $2.5 billion. But all work on the project halted in 2012 when Guinea’s government launched an investigation into how BSG Resources was granted the licence, alleging corruption.

The joint-venture company which held the concession, VBG, was stripped of the rights to mine Simandou in 2014 after Guinea concluded that BSG Resources had bribed government officials to win the concession – which the company strongly denies.

Guinea’s decision to stip BSGR of its licences is subject to an ongoing arbitration case filed at the the International Centre for Settlement of Investment Disputes.

Vale has not been accused of any wrongdoing but its stake in Simandou has been forfeited. The Brazilian major will have to compete in an open tender process if it wants to develop the mine.

Sierra Leone
Across the border in Sierra Leone, the iron ore success stories of last year are now sinking or struggling for survival.

Two late entrants to the iron ore market, UK-listed London Mining and African Minerals, were looking like good bets for anyone interested in investing in West African iron ore this time last year.

But the high costs of production, ebola and the iron ore price rout have claimed their victims, and London Mining went bankrupt in October 2014, cancelling offtake deals with major traders Glencore, Cargill and Vitol.

Then African Minerals halted output at its Tonkolili mine in December, citing a cash flow crisis. The miner is still paying its employees but will suffer a fate similar to that of London Mining if it cannot secure enough cash to see it through the current crisis.

A raft of smaller, non-producing iron ore developers have hunkered down, pushing on with feasibility studies in the hope that prices will revive at some point in the near future.

But with analysts at major banks revising their iron ore price forecasts for 2015 further downward in the second week of January, those smaller producers may be the only optimists left in the market.

This article is an updated version of a feature originally published in the February 2015 issue of Steel First sister title Metal Bulletin Magazine.