Potential in iron ore's dash to quality

Size matters in the iron ore industry, but so does quality.  And if the current high level of demand continues for premium quality ore, then a door will be opened for small mines with high-quality ore to get back into business.

China is the key to what's happening because, rather than buy ore of whatever grade is available, the preference has swung decisively towards material with a high iron content and a low level of impurities to help meet government orders to cut pollution in the smelting process.

The dash for quality is a reminder that in mining 'ore-grade is king', a point that can also be seen in demand for Australian metallurgical coal, the world's best steel-making coal.

This swing to quality over quantity is a reversal of how Australia's two most important export industries have been treated over the past 20 years – but it also represents a return to how both started in the 1960s with Japan seeking premium iron ore and coal for its one-time world-leading steel industry.

Back then it was Japan that discovered it had a steel-industry pollution problem, which is one reason why its steel mills bankrolled the start of the world-class iron ore mines in the Pilbara region of Western Australia. The original projects, such as BHP Billiton's Mt Whaleback mine at Newman and the Paraburdoo mine of Rio Tinto, delivered super-premium lump ore assaying 65 per cent iron and better.

Today, the average grade of ore from the operations of BHP and Rio is closer to 55 per cent, a result of mixing lower-grade ores with the best of the remaining lump ore to achieve a blended product that meets steel-mill specifications, and the enormous quantities demanded.

The 'Pilbara blends' of BHP and Rio are similar in composition to the material delivered by the third big producer, Fortescue Metals.

Blended ore will continue to meet most of the demand from Asian steel mills but there is also a hunt underway for more of the 65 per cent ore that launched the Pilbara iron ore industry and which has recently returned as a preferred ore for the steel-making process, even if it attracts a premium price.

For long-term followers of the mining industry, what's happening today in iron ore is a reminder that it is always the best ore which produces the highest profits, simply because the more metal in an ore the more cash it can generate and the less waste material that has to be dumped.

The great ore shift

Rio chief executive, Jean-Sebastien Jacques, picked up the quality over quantity theme last week after releasing his company's annual profit result, saying that Chinese Government policy was driving a shift from low-grade iron ore to higher grade material.

“It is absolutely clear that the Chinese Government is pushing hard to restructure high-polluting blast furnaces and therefore reduce capacity, but when you look at what would happen, it would remove the low productivity, high-polluting blast furnaces in order to drive the productivity of the best blast furnaces, and in that sense it would be an opportunity for us because we would see a switch from low-grade ore to higher-grade ore,” Jacques said.

Boiled down, Jacques was effectively saying what every miner already knows: 'grade is king'.

The Chinese-led change in demand for premium quality iron ore could have a profound effect on the Australian mining industry, putting some projects under pressure because of grade and/or impurity problems forcing the operator to accept a price discount, while high-quality mines are paid a premium price.

Winners from this increasing preference for quality over quantity include Gina Rinehart and her Roy Hill mine, which produces ore grading more than 55 per cent iron content but has the added appeal of low impurities which attract a discount because of their potential to affect the quality of steel.

A boost for magnetite

Two other potential winners from the drive for quality are two magnetite processing plants operated by Chinese companies in WA, the Karara project which has ASX-listed Gindalbie Metals as a minority partner, and the Sino Iron project which is locked in a long-running legal dispute with one-time member of the Australian Parliament, Clive Palmer.

Widely dismissed as unprofitable and ill-timed adventures in iron ore processing because of high initial construction costs and extensive (and expensive) processing, the magnetite projects take ore grading less than 40 per cent iron and convert it into a super-premium product assaying up to 68 per cent iron with significantly lower levels of impurities; thanks to the processing which removes damaging silica, phosphorous and alumina from the end product.

A hint as to how well the magnetite processors are performing after years on the sidelines can be found in the share price of Grange Resources, a Tasmanian magnetite processor delivering material grading around 67 per cent iron. Over the past eight months, Grange's share price has risen by 200 per cent from 8c to 26c.

Small by conventional iron ore industry standards Grange is producing around 2.5 million tonnes of finished product from its Savage River project and, like the two magnetite mines in WA, is Chinese owned – a reflection of China's hunt for high-quality, low-polluting, ore.

Other small producers of high-quality ore are enjoying a similar uplift as Grange, as was pointed out in my latest Minefield column (Small ore rising, February 1) with Mount Gibson Iron moving closer to a decision on redeveloping the mothballed Koolan Island mine off WA's Kimberley coast, and Atlas Iron proceeding with the development of its Corunna Downs project.

If Koolan Island gets a green light it will neatly link the past with the present because what's happening in today's hunt for high-grade ore is similar to what happened in the 1940s when the island supplied BHP's Australian steel-making business into the 1960s, with its high-grade ore a winner with Japanese steel mills – until it was overpowered by the massive volumes of ore generated by mines in the Pilbara.

The bulk of Australia's iron ore exports will remain the 55 per cent blended material of the big miners as they seek to deliver a product of uniform quality to make steel-making easier.

The downsides of high-grading

But the demand for higher-grade ore will continue to rise as China tightens its environmental pollution laws – and that could revive a debate as old as the iron ore industry itself: will Australia be forced to 'high-grade' its iron ore deposits to satisfy customer demands.

High-grading in the mining industry can be the cause of premature closures because it is a process which involves extracting the best material first, leaving lower-grade ore behind which might not be commercially viable to mine.

Avoiding high-grading is one reason why the big iron ore miners adopted their ore-blending strategy to extend mine life, and why Chinese investors opted to develop the vast quantities of low-grade magnetite ore.

Blending and magnetite processing are in the long-term interests of the Australian economy. High-grading is not, though it does represent a way for small miners to get back into production after being sidelined during the three-year iron ore downturn.