Iron ore price collapse claims more victims

Cliffs Natural Resources (NYSE: CLF) and London Mining (US-OTC: LIIGF; LSE: LOND) have become the latest casualties of falling iron ore prices, with Cliffs warning that it expects to record a US$6-billion non-cash impairment charge in the third quarter on its iron ore and coal assets, and London Mining placed into administration.

London Mining says it will try to work with its administrator PwC to keep its Marampa iron ore mine in Sierra Leone as a going concern, while Cliffs works with its banking group for an amendment to remove the 45% debt-to-capitalization covenant in its revolving-credit facility. The non-cash impairment charge would bring the debt-to-capitalization ratio over this threshold.

(On Oct. 22, Bloomberg and Reuters reported that Frank Timis, through his private company Timis Mining Corp., was close to buying Marampa. Timis is also executive chairman of African Minerals (LSE: AMI; US-OTC: AMLZF), Sierra Leone’s biggest iron ore producer. Its Tonkolili operation is not far from Marampa.)

Iron ore prices have fallen to five-year lows and are down 40% so far this year at US$80 per tonne. Prices from Jan. 1 to Sept. 30 this year averaged US$104 per tonne, down from the full-year average in 2013 of US$136 per tonne. Last month the average price fell to US$82 per tonne, but slipped just below US$80 per tonne in September.

Credit-rating agency Moody’s Investors Service warned in an Oct. 17 report that downward rating actions for iron ore producers could result as it “reassesses the impact of a protracted pricing weakness,” and said it anticipates “pricing pressure and low prices to continue over the next several years.”

Moody’s expects more than 300 million tonnes of new and expanded production coming on the market over the next few years,  and says that given “expectations for muted growth in global steel production for at least into 2016, the lack of equilibrium will continue to weigh negatively on prices and operating performance of iron ore producers.”

And while low-cost producers such as BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RIO; LSE: RIO) and Vale (NYSE: VALE) “have more tolerance to absorb some degree of lower prices in the near-term” than companies like Cliffs, Fortescue Metals Group (ASX: FMG) and Atlas Iron Ltd., Moody’s said “the compression of earnings and cash flow is nonetheless value destructive for the sector.”

In London Mining’s case, its Marampa iron ore mine in Sierra Leone entered production in December 2011 when iron ore was selling for US$140 per tonne.  

It’s not the first time that the mine, which was operated between 1933 and 1975 by the Sierra Leone Development Co. and William Baird, has suffered from depressed prices. Marampa was closed for a period of time in the 1960s due to low metal prices.

Weak market economics, outdated processing technology and civil war then prevented the mine’s redevelopment for over 30 years until London Mining entered the picture and acquired the mining licence in 2006.    

Analysts at Investec Securities in London called the demise of London Mining “a sad day for the U.K.-listed mining sector,” and warned that other iron ore operators in Africa remain at risk. 

“London Mining had developed an impressive little operation in a remote part of the world, but one that ultimately could not withstand global forces,” the securities firm wrote. “Other African iron ore operators could face a similar fate while those not in production, ironically, have the best chance to plod on, for a while at least.”

Graeme Hossie, London Mining’s CEO, said in prepared remarks that Marampa “retains excellent fundamentals” and that the company hopes “to find the appropriate financial support” for the mine “to continue operating over the longer term.”

Management explained that the board had no choice but to place the company into administration “following a longer-than-expected period of negotiations between the senior lenders and the potential acquirers of the Marampa mine, as well as a lack of liquidity due to the dramatic fall in iron ore prices.”  

In September, the company explained in a press release that it was in dispute with Glencore regarding a cash prepayment amount that it claims it had requested “and which Glencore has refused to pay.” It also noted that it was considering options that may be available under its offtake agreement with Glencore — including ending the agreement — and said it was in discussions with its core lender to provide short-term replacement liquidity. The company also explained that it had signed a term sheet with Afreximbank for a US$30-million revolving two-year pre-export financing facility, which had received credit approval from Afreximbank, but was subject to credit approval by the company’s existing lenders.

“London Mining continues to receive strong interest in its offtake — including prepayment financing — and has received expressions of interest from a number of parties to reallocate uncommitted offtake and provide funding for the company in the event that the position with Glencore cannot be resolved,” the company stated in its September announcement to shareholders. “In the meantime, discussions with potential strategic partners are continuing, and are being accelerated.”

But eventually, time ran out.

London Mining entered Sierra Leone in 2005 and began production at Marampa in December 2011. Last year, the mine produced 3.4 million wet metric tonnes (wmt) of sinter concentrate, and the mine was on track to produce 5 million wmt in 2014, according to the company.

In September 2013, a feasibility study showed that the mine could be expanded to 6.5 million wmt a year and extend the mine life to over 40 years, for a capital cost of US$300 million.

The Marampa mine sits on a 28 sq. km licence, 120 km from Freetown and 40 km by dedicated haul road from tidewater at the Thofeyim river terminal.

In addition to full ownership of Marampa, London Mining holds a 100% stake in the Isua iron project in southwestern Greenland, 150 km northeast of Nuuk, and a 25% stake in the Wadi Sawawin iron deposits in Saudi Arabia.