Baffinland aims to revive mining in Canada’s Far North

Developing a mine with an estimated capital cost of $1.5 billion is a daunting proposition for any junior company, particularly if the project is situated in a remote Arctic region with challenging logistics. But with the help of a strong in-house technical team and a strategic investment by Mitsubishi, Baffinland Iron Mines (BIM-T, BIMGF-O) appears to be making good progress with plans to develop a direct-shipping iron ore mine at its wholly owned Mary River project on Baffin Island, Nunavut.

The Toronto-based junior is conducting an $18.3-million work program at its property this year, and expects to complete a definitive feasibility study for a conceptual 10-million-tonne-per-year, direct-shipping lump and fines iron ore operation in the second half of 2007. The study will also investigate the possibility of delivering test shipments of iron ore to market as early as 2008.

Baffinland has already achieved two important objectives since reviving the project in 2004, namely more than doubling the indicated resource to support the proposed mine over at least 25 years, and completing a scoping study examining economic and other aspects of the proposed operation.

The company was able to hit the ground running, as the project already hosted high-grade resources delineated by shallow drilling in the 1960s, following the initial discovery of iron ore in 1962. The project sat dormant for several decades until privately held Baffinland was taken public in 2004 by a technically oriented management team headed by president and CEO Gordon McCreary.

Baffinland has since spent more than $25 million on the project, not including the $18.3 million expected this year. The recent drilling programs and historic work allowed the company to release a new resource estimate for Deposit No. 1 in early May. It was the first resource estimate released in four decades.

Deposit No. 1 is the most advanced of five known deposits that collectively constitute the Mary River project. It hosts an indicated resource of 309 million tonnes at an average grade of 66.1% iron, plus an additional inferred resource of 28 million tonnes grading 65.9% iron, defined within a potential open pit. Additional high-grade mineralized material occurs outside the proposed open pit.

At the time, McCreary noted that the new estimate for Deposit No. 1 represented only a portion of one deposit, yet the indicated resources alone exceeded the company’s goal of more than doubling the historic resources delineated in the 1960s.

“Four additional high-grade deposits outcrop over significant strike lengths and thicknesses on our wholly owned mining leases,” McCreary added.

The new resource estimate also included “appropriate assumptions” for internal mining dilution and mining recovery losses, and an assumption of 75% lump ore and 25% fines based on comprehensive metallurgical studies done in Germany.

In mid-May, Baffinland released the results of a scoping study for Deposit No. 1 by Aker Kvaerner, based on the direct shipment of 10 million tonnes of high-grade (66%) iron per year to European markets. Using the base-case price assumptions of US$38.62 per wet tonne for lump ore, and US$29.84 for fines, the project would generate a pretax internal rate of return of 15%, with a payback period of just under six years. Projected cash flow over the 34-year mine life was estimated to be more than $6 billion.

The scoping study used conservative parameters with respect to the iron ore market, which is enjoying robust prices because of new demand growth, particularly from China. The increased demand and prices have translated into significant profits for three of the world’s largest mining companies. Iron ore currently accounts for 25-30% of the operating profits of BHP Billiton (BHP-N), 40-45% of the operating profits of Rio Tinto (rtp-n), and 70-75% of the operating profits of Brazil’s Companhia Vale do Rio Doce (RIO-N) (CVRD).

Baffinland expects the iron ore market to remain tight for the next several years because of continued demand growth from China, and also because of the “muted supply response to date.”

The majority of output from Mary River is expected to be lump ore that commands a market premium. Prices for iron ore fines are also strong, having increased 9% in 2003, 18.6% in 2004, and 71.5% in 2005, with further increases this year.

The scoping study used FOB (free on board) Baffin Island sales prices that are about 25% lower than 2005 market prices, and about 36% below the 2006 price agreement for fines announced in mid-May by ThyssenKrupp and CVRD. McCreary stated that even though conservative assumptions were used throughout, the scoping study “demonstrates the economic strength of the initial development scenario” for the Mary River project.

The study envisions a conventional open-pit mine using owner-operated electric shovels and 100-tonne haul trucks. The run-of-mine ore would be hauled to a primary crusher 200 metres south of the deposit, resulting in two stockpiles each containing 250,000 tonnes (one for lump and the other for fines) near a proposed rail load-out facility at the mine site.

Trains would then transport the crushed ore 93 km to port facilities at Milne Inlet. The proposed railway system would also be used to transfer supplies and equipment from Milne Inlet to the operation.

The feasibility study will include an alternative transportation corridor extending 140 km south to Steensby Inlet. If the Milne Inlet option is chosen, the port will accommodate Cape-sized bulk carriers for nine months of each year. The shipping season could potentially be extended through the use of the modern ice-breaking vessels.

Environmental base-line studies have been under way for two years, and are expected to be complete by late 2007. Negotiations for the Inuit impact and benefits agreements have also been launched; the company hopes they will also be completed by late 2007.

No mines currently operate this far north in the Arctic, but several base metal mines have operated successfully even further North for many decades. Mary River is situated south of the Nanisivik mine, which produced zinc and other metals for 26 years, until it was closed in October 2002.

Northern challenges

The lack of infrastructure and other logistical challenges mean capital costs will be high, estimated at $1.5 billion, including working capital. Sustaining capital is estimated to be $2 million over the life of the project, including reclamation and closure costs. Cash costs per tonne are expected to be in the lowest quartile, delivered to Europe.

The company intends to advance the project to feasibility in the second half of 2007.

Because there won’t be an energy guzzling processing plant on-site, the project isn’t particularly sensitive to fuel prices, unlike most Northern operations. Rail transport is also energy efficient and offers additional savings relative to other transportation options.

Capital costs will be sensitive to the price of steel because of the need for trucks, crushers, rail cars, ships, etc., but on the other hand, high steel prices typically mean strong prices for iron ore, which is used to make steel.

The project is highly sensitive to higher levels of throughput, because of the long-term nature of the project and the need for rail, port, ships and other assets to exploit it, which explains why the company intends to continue drilling as the feasibility study continues. This year’s program includes 5,000 metres of infill drilling on Deposit No. 1, geotechnical and condemnation drilling, and 3,000 metres of exploration drilling to test the “blue sky” potential of Deposits 2, 3, 3A and 4.

In the coming year, Baffinland intends to explore and establish long-term iron-ore delivery contracts with global steel producers. The company also hopes to attract an additional “strategic investor” to help further advance the project.

Late in 2005, Japanese trading and investment house Mitsubishi bought 2.75 million shares of
Baffinland at $2.00 per share through a non-brokered private placement, resulting in gross proceeds of $17.5 million. As part of the private placement, Baffinland granted Mitsubishi certain marketing rights for a portion of future Baffinland iron ore production.