Labrador Iron Mines falls on hard times

Despite having the distinction of being Canada’s newest and only independently owned iron ore producer Labrador Iron Mines’ (LIM-T) has been on a rough ride over the last while.

In April of last year the company’s stock was trading in the $14.00 range; it began 2012 trading in the $5 to $6.00 range; by August its highest close was $2.17, and on Oct. 2 the company’s maligned stock finished the day trading for just $1.01 — off 10% from its close the day previous.

The latest drop came after it announced an equity financing deal that will raise $30 million for working capital and general corporate purposes, but will dilute current shareholders to the tune of 30 million new shares in the process.

That represents a 34% increase in paper over the previous 67.3 million shares outstanding, and it had analysts revising price targets for the company downward.

Haywood Securities analyst Colin Healey, for one, lowered his target to $2.40 from $4.70 per share.

“Labrador Iron Mines is in the middle of a difficult iron ore market as current iron ore price levels continue to exert margin pressure on LIM and threaten to reduce realizable cash flow from sales,” Healey wrote in a research note.

Healey also pointed out that the equity issuance price of $1.00 per shaer is a 31% discount to LIM’s 20-day volume-weighted average price of $1.44 and an 11% discount to the price at announcement of $1.12.

The monumental slide in the company’s market cap has come amidst steep declines in iron ore prices — a slide that accelerated just after the company reached commercial production at its James Mine and Silver Yard processing plant.

The company’s plan has been to generate 2 million tonnes of production from James and then move on to its second stage of development by mining its flagship Houston deposit by the middle of next year.

Houston has measured and indicated resources of 23 million tonnes of grading 57.2% iron and is expected to add over 2 million tonnes of iron ore production per year over a 15 year mine life.

But with the price of the metal falling roughly 30% to below US$90 per tonne over the course of August, LIM had to hold off on its bold development plans.

In early September the company announced that all capex connected to the Silver Yards processing plant and the mining of the Houston deposit have been deferred and that its 2012 exploration program was being cut to $5 million from the original budget of $8.6 million.

It also halted the use of its higher cost wet processing plant at Silver Yards and will instead use its lower-cost dry processing system. It was able to make the switch thanks to ore from James being soft and high grade, thus lending itself to a more simple processing system that doesn’t need washing. The dry process stream has a design capacity of 20,000 tonnes per day.

The steep fall in iron ore prices in August was connected to reduced demand from China after steelmakers went on a buyer’s strike and liquidated inventories.

As for the future, the company says it expects a rebound in iron ore prices, a thesis that is supported by Haywood’s Healey, and by the metals recent minor recovery to US$106 per tonne.

LIM says that the recent destocking by Chinese steel producers can’t continue indefinitely and buyers will return to the market. It also argues that with current Chinese import prices being well below the marginal cost of Chinese production, there is an implied floor on the price of iron ore of US$120 per tonne.

Healey expects iron ore price to average out at US$118 per tonne over the course of next year.

On the more positive side of things, the company recently reached an agreement with the Sept-Iles Port Authority that will give it access to a minimum of 5 million tonnes per year of capacity at a cost of $12.8 million.

But if prices don’t recover, it will not likely use up half of its allotment.

Without Houston coming on stream, Healey estimates, LIM could produce 2 million tonnes of iron ore from James for five years.