Iron Ore’s Cautious Evolution

Iron ore was in the spotlight during the 19th trading week of the year, from esoteric new hedging opportunities to derailed grassroots iron ore deals.

• Reflecting the accelerating pace of business, the pricing mechanisms for iron ore contracts look to be undergoing a major shift away from year-long contracts towards more frequent cash settlements.

Three of the biggest banks involved in commodities — Morgan Stanley, Goldman Sachs and Barclays Capital — are moving with varying enthusiasm into cash-settled iron ore swaps, while London’s ICAP is brokering iron ore derivatives. Credit Suisse and Deutsche Bank launched the very first cash-settled iron ore swap a year ago.

The changes are taking place against devastated iron ore and steel markets. ArcelorMittal, the world’s largest steelmaker, now sees steel demand falling 15-20% this year, which would be the biggest percentage decline since the Second World War.

• Meanwhile, junior Canadian iron ore developers are having great trouble closing deals with their erstwhile Chinese suitors, who are grinding them hard on pricing.

The first hit was Macarthur Minerals, which watched its somewhat improbable US$100-million deal for its Lake Giles iron ore deposit in Western Australia fall through in March after several deadline extensions.

At presstime, Cardero Resource was struggling to close any kind of deal after the Nanjinzhao Group balked at the last minute to consummate its agreement to buy the junior’s Pampa de Pongo iron ore deposit in Peru for the full US$200 million that was agreed upon last October.

And we’ll now see what kind of price reduction may be in store for Consolidated Thompson Iron Mines, which was hit on May Day with a minimum one-month delay on a previously announced, US$240-million strategic investment by Chinese steelmaker Wuhan Iron and Steel — funds that would have been earmarked for development of the Bloom Lake iron ore assets in the Labrador Trough.

Back home, Chinese steelmakers are reportedly under pressure from their government bosses to rein in production, particularly while annual price-settlement talks are under way with the large Western iron ore exporters.

• The Silver Institute and GFMS released their World Silver Survey 2009, which showed a robust silver market in 2008 and early 2009, with substantial drops in demand from industrial applications, photography and jewelry made up for by the surge in investment demand. Spot silver prices averaged US$14.99 per oz. in 2008, the second-highest average ever, in nominal terms, as a record 93.1 million oz. flowed into the three main silver exchange-traded funds.

Global mine production rose by 2.5% to 680.9 million oz. silver last year, driven, as the authors note, by strength in the gold and lead-zinc byproduct sectors (as primary silver mines only account for 28% of mine production).

This output represents the sixth year in a row of expanding mine production, and accounted for 77% of total supply last year. Peru again ranked as the world’s biggest silver-mining country, followed by Mexico, China, Australia and Chile.

• Anyone involved with mining in B. C. was relieved with the “three-peat” re-election of Premier Gordon Campbell and his centrist, business-friendly Liberal party in a solid win over the left-leaning New Democratic Party. In a province known for its sudden lurches from left to right and back again, it’s a continuation of a rare period of stability and predictability. While some had grown tired of the Liberals and such foolishness as their carbon tax, the dissatisfaction wasn’t acute enough to make the NDP widely palatable in a province reeling from recession, especially in the forestry sector.

• In the Prairies, there was a flurry of excitement with uberpromoter Bob Friedland becoming chairman of junior Potash One. The potash industry has a high barrier to entry, but leave it to Friedland to make potash seem exciting and raise the necessary billion-dollar cover charge to get into Saskatchewan’s lucrative potash patch.

• It’s a nice footnote to HudBay Minerals’ wild winter: after all the corporate bloodletting brought about by its failed acquisition of Lundin Mining, HudBay has announced it will pocket a tidy $100-million profit from selling its 16.7% stake in Lundin to GMP Securities for about $236 million.

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