Eastern Canada’s iron ore belt drawing new interest

Mar08,2011 7:07AM EST

Forget about gold, copper, and other hot commodities. There may be money-making potential in a much more mundane item: iron ore.

Like its better-known commodity cousins, the key steel-making ingredient has also been on a tear, an upward price move that is attracting new attention to one of Canada’s oldest mining plays, the iron-ore laden area straddling the boundary between Quebec and Labrador.

he possibility that Eastern Canada could become a global heavyweight in iron ore production - a domestic version of the current behemoths in the mineral such as Brazil and Australia - is beginning to make the rounds on Bay Street as an investment idea with big promise.

The concept was highlighted Monday by news that India’s Tata Steel Ltd. had agreed to a deal worth up to $4.85-billion to develop deposits in the region owned by New Millennium Capital Corp. In January, another company active in the area, Consolidated Thompson Iron Mines Ltd. (CLM-T17.150.030.18%), received a $4.9-billion takeover offer from Cliffs Natural Resources Inc. (CLF-N96.700.930.97%)

Such big-dollar expressions of interest are leading many brokers and mining newsletters to begin touting the entire area as an investment possibility that will profit from the burgeoning market for the distinctive, red-tinted ore.

Desjardins Securities, for instance, recently hosted a conference featuring the potential of the area, suggesting it could be producing more than 100 million tonnes of ore annually, or about triple current levels, by 2020. Desjardins doesn’t have any current picks, but its two most recent in the sector - Consolidated Thompson and Baffinland Iron Mines Corp. (BIM-T1.49----%) - were subject to takeover offers. “Everything we covered got taken out,” says the firm’s base metals analyst John Hughes.

An added attraction is that the ores being discovered are about 15 per cent richer than those in Australia, a huge plus for a bulky commodity that is costly to ship, according to Mr. Hughes.

One firm that has a pick in the region is Jennings Capital, which has pegged Labrador Iron Mines Holdings (LIM-T13.55-0.44-3.15%) as a speculative buy with an $18 target. Reflecting the dramatic recent investor interest in the sector, shares of the emerging producer are up to about $14, from less than $4 as recently as July.

Newsletter writers at the Hard Rock Analyst have also been intrigued, saying last month that “Canada’s main iron belt is now joining the list [of] mining districts where those of us who track the sector are getting excited by the prospects for a many-fold increase in production to meet Asia’s growth needs.”

Geologists have known for decades that the region - known in the profession as the Labrador Trough - has iron resources. After all, the metal has been mined since the mid-1950s, starting at the Iron Ore Co. of Canada’s operation at Schefferville, Que.

But the area languished after its 1950s heyday, until the emergence of China and India as major consumers of steel made miners scour the globe to feed the Asian economic giants’ appetite for raw materials.

Top Picks

There are six juniors followed by analysts as possible producers in the region, adding to Labrador Iron Ore Royalty Corp. (LIF.UN-T75.950.891.19%), a long established way to play the sector, and New Millennium, which announced the deal with Tata Steel.

The publicly-traded company closest to becoming a producer is Labrador Iron Mines. The company expects to have its mine near Schefferville in operation in April, a development that caused Jennings Capital to raise its target.

Adriana Resources Inc. (ADI-X1.430.118.33%) has one of the largest iron reserves in the area, with an estimated 1.5 billion tonnes of iron in the ground, according to an estimate issued last week by Desjardins. The company also has announced a strategic partnership with Wuhan Iron & Steel Corp., a major plus considering the high capital costs of developing new mines. As part of the arrangement, the Chinese steel maker has taken a 19.9-per-cent interest in Adriana.

Advanced Explorations Inc. (AXI-X0.690.011.47%) is also part of the rush to develop mines in Eastern Canada, although it’s also exploring Melville Peninsula in Nunavut. According to its presentation at the Desjardins conference, the company has enough ore for a 50-year operation based on current resources.

Another junior active is Alderon Resource Corp. (ADV-X3.72-0.09-2.36%) It’s currently conducting a drilling program to determine the size of the resources on its iron ore project.

Champion Minerals Inc. (CHM-T2.690.083.07%) has two major deposits and a smattering of smaller ones that were explored during the 1960s. It has total reserves of more than 1.2 billion tonnes grading about 30-per-cent iron.

At the northern end of the Labrador Trough, Oceanic Iron Ore Corp. (FEO-X0.820.022.50%) is hoping to strike it rich in the Ungava area of Northern Quebec. Its properties were scouted during the 1950s and 1970s, but because of the remoteness of the area, were never developed.

Mr. Hughes says iron ore prices are likely to be strong for years due to rising Asian demand and the slow pace at which new mines come on stream, a plus for the companies looking for the metal. “We just don’t see a quick fix to fill that [supply] deficit in the market over the next several years,” he said.

Labrador Trough iron ore developers comparative valuation table

Company

Market Cap ($ mil.)

Iron Ore Resources (millions of tonnes)

Company-owned iron in the ground (millions of tonnes)

Mkt. Cap/tonne of iron in the ground ($)

Labrador Iron Mines	619	137	79	7.80
Adriana Resources	115	12,578	1,563	0.07
Alderon Resource	284	700	217	1.31
Advanced Exploration	96	360	50	1.90
Oceanic Iron Ore	119	2,683	877	0.14
Champion Minerals	170	603	144	1.18

Source: Desjardins Securities, Bloomberg

Tags :metal analyst, Labrador Iron Mines, raw material, steel mills, take over, Cliffs Natural,