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It's a double-dose of uncertainty for Labrador's iron ore industry

By Terry Roberts

August 11,2015

There's more unsettling news for the iron ore industry in Labrador West after a Canadian investment firm suggested IOC is in danger of closing, while hope continues to fade for Alderon's much-hyped Kami Project.

A report by Raymond James Ltd., suggested that mining giant Rio Tinto, majority owner of the Iron Ore Company of Canada, is losing money at its Labrador City operation, which employs an estimated 2,000 workers.

"Iron ore prices continue to weaken and by our estimates are below the operating cost at the mine," the firm wrote in an investment overview published in late April.

Analysts at Raymond James estimate IOC will receive an average price of US$62.50 per tonne this year while costs are estimated at $US68.50.

One analyst said the operation is a "drain" on Rio Tinto and "we believe there is a risk IOC may close if its costs and productivity do not improve."

Still reeling from Wabush closure

A closure at IOC could spell the end for Labrador West, which was built around the iron ore industry and is still reeling from the closure of Wabush Mines in 2014, which claimed nearly 500 direct jobs.

The mining industry worldwide has been hit hard by low commodity prices caused by a combination of decreasing demand in China, and increased production by industry leaders like Rio Tinto, BHP Billiton and Vale. Companies like Rio Tinto have been cutting costs in order to offset the drop in prices with the priority shifting from price to volume. During a conference call with investors last week to discuss mid-year results for 2015, top executives with Rio Tinto refused to say whether IOC was in jeopardy of closing. CEO Sam Walsh said there's been a strong focus on reducing costs at IOC, which is considered a higher cost operation because of the distance to Asian markets and other factors. He also emphasized that IOC president Kelly Sanders moved his headquarters from Montreal to Labrador City "so he can physically ensure that we're taking every step possible to optimize that business." A year to turn things around The Australian newspaper said Walsh and chief financial officer Chris Lynch told industry analysts recently that IOC could be at risk if productivity plans are not successful. The paper reported Tuesday that IOC reported a $US1-million loss in the first half of this year, down from a $US97-million profit a year earlier. Another investment firm, UBS, reported Monday that Walsh told analysts in London that every operation with Rio Tinto must be profitable, or have a plan for recovery. Walsh reportedly said that IOC is cashflow positive, but UBS reported that "management will close Iron Ore Company of Canada if it becomes cashflow negative." Another analyst said IOC will have until the end of 2016 to turn things around, and this will be a challenge as more low-cost mines in places such as Australia are either expanded or come onstream.

Ron Thomas, president of Local 5795 of the United Steelworkers in Labrador City, was unaware of the pessimistic outlook when contacted Tuesday. "They're the ones who are holding all the straws. If they're going to shut her down, they're going to shut her down," said Thomas. "Am I concerned? Usually if they're out talking out it ... usually if there's smoke there's fire," he added.

Thomas said he wanted to acquire more information before making any further comment. Attempts to arrange interviews with officials from Rio Tinto, Raymond James and the Newfoundland and Labrador government were unsuccessful Tuesday. Alderon cutting costs, shuffling at the top Meanwhile, hope is also fading for the Kami mine project in western Labrador. Construction of the mine was scheduled to begin in 2014, but the company is having trouble arranging financing amid difficult market conditions. In a news release issued Tuesday, Alderon Iron Ore Corp. outlined a series of cost-cutting measures, and also announced a "re-scoping" of the capital and operating costs for the project in order to identify savings. The company said it is also "evaluating strategic alternatives."

Some of the cost-cutting measures include an interest deferral agreement with one of its lenders, voluntary partial payment deferrals with equipment vendors for work already completed, workforce reductions, and the implementation of a deferred stock unit plan for directors in place of cash director fees.

The corporation also announced a shake-up at the top, with Mark Morabito set to take over as chief executive officer on Aug. 24, replacing Tayfun Eldem. Morabito said he held meetings recently with Alderon's partner, China's Hebei Iron & Steel (HBIS), and some Chinese banks. "As a result of these meetings, Alderon is going to proceed with a re-scope of the project in order to identify savings resulting from the current market environment and HBIS and the Chinese banks have agreed to participate in the process," Morabit said. "If cost savings can be identified in the re-scope of the project, this will provide significant assistance in completing the financing plan for the Kami Project."

Terry Roberts is a journalist with CBC's bureau in St. John's.