Gindalbie bets on a Karara premium

Gindalbie Metals is close to opening Australia's first fully operational magnetite iron ore mine, in a project shining a light amid the dim outlook for mid-west iron ore.

The opening of Gindalbie Metals' export terminal in Geraldton yesterday lit a small flame of hope in the gloom surrounding iron ore mining in Australia's mid-west.

The export terminal's opening at Geraldton Port signifies one of the last hurdles before Gindalbie's Karara iron ore project becomes Western Australia's first fully-operational magnetite iron ore mine.

In the broader context of Western Australia's iron ore output, Karara's expected stage-one production of 10 million tonnes per annum seems piddly compared to the low-cost, high-volume hematite projects of BHP Billiton, Rio Tinto and Fortescue Metals. But there are some noteworthy points of difference between the iron ore miners of the mid-west and their Pilbara counterparts.

The gloomy outlook for the Oakajee Port and Rail project and recent fall in the iron ore price has dominated the conversation around the prospects of iron ore mining in the mid-west, and led to a far more uncertain outlook for the region's smaller, less advanced miners than those in the Pilbara.

It would seem that if Andrew Forrest and Australia's third-biggest miner Fortescue were in such trouble because of the recent drop in the iron ore price, then all those smaller miners further south must be shot.

OPR was initially scheduled to be complete by 2014, but the project has been in beleaguered for some time. This was magnified when Murchison Metals sold its stakes in OPR and Crosslands Resources – which is responsible for developing the expansion of Jack Hills – to Mitsubishi for $325 million in November last year. And with the current volatility in the iron ore price, no one seems willing to take a punt as to when Oakajee might, if ever, be completed.

This means the futures of two of the mid-west's bigger Oakajee-dependent projects, Jack Hills and Chinese company Sino Steel's Weld Range, are impossible to predict.

But Karara is a little different and a closer look at the project's make-up sheds a small light on an otherwise dark horizon for mid-west iron ore.

First of all, unlike many other projects in the region, which are still in their early stages or require further financial backing or infrastructure, it has managed beat the recent downturn in the iron ore price and is already producing and hauling iron ore to Geraldton Port. The first shipment of magnetite concentrate is scheduled for the December quarter.

Simply put, hematite, or 'direct shipping ore' is what most of the Pilbara miners dig up and has a higher iron content in its natural state, making it cheaper to produce. The highest grade DSO mined by Rio Tinto and BHP has an iron content of about 62 per cent. Fortescue and Atlas iron produce slightly lower grades of hematite and get paid accordingly.

On the other hand, magnetite has quite a low iron content when the ore is first mined and requires a more intensive milling process, but the resulting magnetite concentrate, with an iron content of between 65 and 70 per cent, sells at a premium.

Gindalbie spokesman Michael Weir told Business Spectator that the miner is expecting magnetite to become a niche market in the medium to long-term because Chinese steel mills require less energy to process it, its higher grade content means more steel per tonne and because its processing uses less coal it produces less carbon emissions than hematite over the its lifecycle from mine to finished steel.

The number of directly owned Chinese companies or Chinese-backed projects in the mid-west seems to support Weir's point of view.

Karara is a 50-50 joint venture between Gindalbie and Ansteel, one of China's largest steel mill owners. In fact, Ansteel has signed an off-take contract for the entire 50-plus year life of Karara meaning it will buy all the iron ore it produces at market prices.

Weir said that Gindalbie forecasts its production cost will be around $65-$68 per tonne, but that these projections were 15 months ago and don't factor in the carbon tax.

Patersons Securities resources analyst Tim McCormack said he thought Gindalbie's cost projections are "ambitious".

However, analyst expectations for Karara's output centre around its magnetite concentrate yielding a fixed 15-20 per cent premium on the spot iron ore price, which could be advantageous as the quality of existing hematite deposits diminish.

The total cost of the first stage of the mine was $2.57 billion, of which 90 per cent was spent in Australia and $250 million just in the mid-west. So the total spend to this stage was a significant boon to Geraldton's economy, which has a total output of about $4.5 billion a year.

As we've seen recently though, the iron ore price is everything in the current high-cost caper and Patersons' McCormack said a price of $US120 per tonne and above was about the figure that Karara and other prospective iron projects in the region would be hoping for in order to make a real fist of things.

Given Karara's second stage is expected to yield upward of 30 Mtpa, the mid-west region will be hoping the price is right.

"I think there's been a lot of sceptics out there but I think this is showing the mid-west is developing," Weir said.

He might be right, but with Karara the exception to the rule and many of Geraldton's growth prospects hinging on the success of iron ore mining in the region, it wouldn't take much to snuff out the flame.

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