Iron Man

Up Here Business April 2008

Thirty years ago, like all his Queen’s University classmates, Gordon McCreary wrapped up his MBA program with a thesis. Although he titled it “A Preliminary Discussion of Factors Relating to the Transportation of Iron Ore from the Arctic Archipelago”, its focus was on one particular spot in that archipelago: the rich iron ore deposits of Baffin Island’s Mary River.

The dissertation gathered dust over the years, but McCreary never forgot the allure of those deposits. Today he’s president and CEO of Baffinland Iron Mines Corporation, whose sole purpose is to get into production the 365 million tonnes of proven and probable reserves on the island and ship it 3,100 nautical miles to Europe’s hungry blast furnaces.

The 65 per cent grade deposit, which sits 160 kilometres south of the community of Pond Inlet, Nunavut was discovered in 1962. It’s a classic Northern Canadian resource case, a parallel to the oil sands: known for a long time, just waiting for the right commodity price to make production economic. Like crude oil, “all the low-hanging fruit is gone,” McCreary says. When ore prices began to rise in 2004, he figured Mary River’s time had come.

It was a good call. The tear has continued: a 71.5 per cent iron ore price increase in 2005, 19 per cent in 2006 and 9.5 per cent in 2007. This year, there has been another gargantuan jump – steel giant ThyssenKrupp agreed to pay Brazil-based Companhia Vale do Rio Doce 65 per cent more than last year for ore. CVRD is one of three companies dominating the global sea-borne supply of iron ore; Rio Tinto and BHP Billiton are the others. The three loom large over annual price negotiations, and should BHP win its unfriendly $147-billion (U.S.) takeover of Rio Tinto, market dominance would further tighten and drive steel producers to seek their own dedicated ore suppliers.

Picking up on the momentum, Baffinland has lined up five European steel producers with letters of intent to take 16 of the proposed initial 18-million-tonne annual production scheduled to start in 2014. Japan’s Mitsubishi, holding a small equity stake, has an option on another million. But before any final off-take agreements are signed, these steelmakers will have to be satisfied with results of a 250,000-tonne sample processed through their blast furnaces, “a significant de-risking point,” McCreary says.

There’s some work yet before that sample leaves Baffin Island. The company has already built a massive camp, positioned a crusher, and established an airstrip, bulk fuel storage, an ore pad and stevedore’s equipment at nearby Milne Inlet. It’s also built a 100-kilometre road to connect with the deposit. “The mine haul road will accommodate 773 [size] trucks,” says Rod Cooper, Baffinland’s vice-president and COO. “We’ll begin blasting the ore over the next while and hauling it off the mountain and crushing it. By mid-August we should have 350 people on site.” He says they’ve chartered two ships from Canadian charter company Fednav, to load the sample and sail for Rotterdam, Germany in late summer.

Should the clients be happy with the ore and Baffinland get its license as expected by 2010, mine construction should move into high gear with an infrastructure worthy of a small city: deepwater port, railway, 737-capable airport and accommodations for 500 employees. Capital costs would be $4.1 billion.

Production will be shipped out of a port to be built at Steensby Inlet, 143 kilometres to the south of Mary River. A combination of factors decided this: seasonal floe edge activity to the north would have meant an eight or nine month shipping season. “So we’re going to the south coast where we can ship 12 months,” McCreary says. And less severe ice conditions to the south mean Class 4 icebreaker carriers rather than the Class 6 Milne Inlet would require. The 10 ships will be owned by a pool of investors and operated under the stewardship of Fednav. Baffinland will charter them.

Ore would be crushed and screened from an open pit and loaded onto trains for the trip south to the port. Cooper says basic engineering for the railway has started. The southern third is mostly bedrock, and “in the middle section we have to design foundations for the permafrost.” He says for the last 20 kilometres he says the company will need some intensive engineering to work around ice lenses.

It’s an ambitious project that may grow to 30 million tonnes a year – nearly equal to Canada’s entire 2007 iron ore production. Cooper says an expansion would involve a larger open pit, but little extra capital cost. “We’d have to develop expansions to the crushing and screening, but the railway will be capable of handling the increased tonnage,” he says. “The port site wouldn’t need much at all.”

A feasibility study released February 19 endeared Baffinland to a number of investment analysts. One raised the company’s stock to “Outperform2”, meaning it’s expected to outperform the S&P/TSX Composite Index over the next 12 months. “Baffinland Iron Mines continues to make its way on the radar screen of the iron ore and steel industry as well as garnering growing levels of investor attention as the need for increasing amounts of high quality iron ore becomes more apparent,” says Tom Meyer, base metals and mining analyst with investment firm Raymond James. “Baffinland shares remain undervalued.”

Perhaps words like these will attract needed investors. Four billion dollars is a tall order for a junior with a market capitalization of less than 10 per cent of that. Already $170-million has been sunk and that’s expected to reach $250-million by the end of this summer. But McCreary is confident that with the favourable feasibility study and as de-risking progresses, potential joint venture partners and other investors will take note. “Globally we are truly a somebody out there now,” he says. “So far we’ve been known as a flow-through participant but now we’re making that transition to a broader-based institutional interest.”

But 2014 is still six years away. Even if schedules and budgets endure, could Baffinland miss the ore price bull run? “Baffinland is extremely competitive in terms of ore grade,” says Denise Young, resource economist and Associate Professor in the University of Alberta’s economics department. “But a lot depends on how high iron ore prices remain.” She says future demand and supply can be affected by new projects attracted by the high prices.

Already several have been announced including a $333-million (U.S.) development by Consolidated Thompson Iron Mines in Quebec. Canadian juniors are on the search in Brazil, Peru, Sweden and another in Nunavut: at Roche Bay on the east coast of the Melville Peninsula. On the larger scale, CVRD announced it’s spending over $10-billion (US) on its Brazilian iron ore mines to increase production by 115 million tonnes per annum; bringing its total to 422 by 2012 – two years before Baffinland comes on stream. “If enough new sources come online, this could dampen prices,” Young says, adding that it’s happened before, with copper.

Young also feels there are uncertainties with government expectations too, “given that mining has not had a major presence historically in Nunavut and policies and procedures are being developed.” She says the Baffinland lease commenced before the 1999 creation of the territory, so it is grandfathered, but there will surely be some ‘learning-by-doing’.

Socioeconomic impacts are of course paramount amongst these. The company expects to employ up to 200 local Inuit. “The economic impact would be considerable for a community of our size,” says Colin Saunders, Pond Inlet’s community economic development officer, who is so far pleased. “Local benefits to date include contracts with the local co-operative, as well as employment for residents.”

But he’s already identified some specific concerns, like service vehicle operators. “There may be a situation where our municipal services and heavy equipment operators may wish to go work out at a mine site should there be significant wage differences between the community and the potential mine.” However, he expects benefits to outlying Baffin Island communities as well, including Igloolik, Hall Beach, Arctic Bay and Clyde River.

Economic development officers from these hamlets recently held a conference in Pond Inlet where these and other issues were raised. Prominent were environmental concerns around Steensby Inlet and on caribou populations. “There currently are ongoing caribou habitat studies taking place, as the deposit itself lies on caribou calving grounds,” Saunders says.

While the environmental impact study isn’t yet completed, the Nunavut government says they’ll be liaising with Parks Canada on mitigation of possible impacts on important nesting grounds at Sirmilik National Park on the island’s north end. “Based on our knowledge of Baffinland’s current plans, the components of the project most likely to impact the park are possible increase in summer barge traffic through Milne Inlet and air traffic,” says Mike Atkinson, Nunavut’s manager of environmental assessment and land use. With regard to the railway he says these relate mainly to wildlife. “Of greatest concern would be the railway’s potential to act as a barrier to migration/movement of caribou and wolves, or disturbance to raptors,” he says. And, with respect to noise, “knowing and avoiding sensitive times and locations for blasting is a key aspect of mitigation,” he says.

Minimizing noise disruption will be important for the protection of marine mammals too. While the majority of the sensitive narwhal population is to the north of the island, other sea mammals such as bowhead whale and walrus, which also navigate via acoustics, travel through Foxe Basin. “Ship’s propeller noises are loud,” says Peter Ewins, director of species conservation for World Wildlife Fund-Canada. “So on top of hunting and climate change, acoustic disturbances will exacerbate problems for these species.” He says a long range strategic study is needed.

So, much has been done and much still needs to be done. But McCreary is determined to address all issues. He says his 1978 thesis concluded it would take a robust market in iron ore for the Mary River project to make it. “And now, this is that market; this is the time.”

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