Magnetite Mines 2017 Chairman's letterGordon Toll
DEAR SHAREHOLDERS, Several thoughts occur as I reflect on events in the iron ore business during the 2016/17 Australian financial year.
GENERAL ISSUES It was a time when prices in reality beat the pundits’ forecast prices very significantly and particularly for higher quality ores and concentrates. During this time, premiums for high-grade ores and concentrates increased significantly as did discounts for low-grade ores. We observed the hitherto unusual phenomena of high-grade iron ore prices increasing while low-grade ore prices simultaneously decreased. I believe the deep discounts on low quality ores and concentrates will continue. We may witness a situation in the future, when not even deep, deep discounts will ensure the sale of poor quality ores and concentrates. A new “quality” paradigm is emerging amongst blast furnace (BF) steel makers. Even the media and financial sectors have begun to realise that in an energy and emissions conscious world, for steel making, high-grade ores and concentrates are significantly more desirable than low-grade ores. Phosphorous levels in some company’s Pilbara sinter blends became such that their spokes persons refuse to publicly speak about them. To offset this increase in phosphorous levels in dominant products, the steel makers, of necessity, must seek ultra low phosphorous iron sources such as our magnetite concentrates. Phosphorous, even in relatively small quantities, has an extremely deleterious effect on the strength of steel. In all steel making technologies, removing phosphorous from the molten metal is prohibitively expensive. Hence, only a low phosphorous ore/concentrate blend is an acceptable starting point for steel makers. In the next 5 to 10 years, about 200 to 300 million tpy of mining capacity in the Pilbara will exhaust the orebodies being mined by that capacity. Development of replacement orebodies - if available - will absorb a lot of capital. In a majority of cases the quality of the replacement ore will be inferior in quality to that which it replaces. At the same time, similar events will unfold in Vale’s southern production system in Minas Gerais. These trends are all conducive to the development of new sources of high-grade iron ores and concentrates such as those that may be produced in the Mawson Iron Province.
A NEW APPROACH TO INITIAL DEVELOPMENT In consultation with our Company, Lodestone Equities Limited (Lodestone), our associate in the South Australian Magnetite Consortium, began work on a lower cost, fast track start up project, which would use the existing ARTC standard gauge railway. This project is based on resources on wholly owned Exploration Licenses immediately south of Olary Siding on the ARTC railway. Initial test work indicates that a product suitable for the high margin Direct Reduction steel market may be produced from these resources. Lodestone is continuing to fine-tune the configuration of this phase one, fast track development. A definitive feasibility study is planned for the near future. This lower cost, fast track project should have flow-on benefits for our company.
FUNDING THE OLARY DEFINITIVE FEASIBILITY STUDY Lodestone has conducted a focused scoping study to select best options for the configuration of such a smaller, fast tracked, start up project. A document titled “The Narrative Report” (Narrative) is being compiled to summarise the results. The results presented in the Narrative will form the basis of a Preliminary Economic Analysis (PEA) of the Olary project.
The purpose of the Narrative and the PEA (including a comprehensive financial model) is to derisk the Detailed Feasibility Study (DFS) of the Olary Project and facilitate the raising of funds for the DFS and Basic Engineering.
MARKETING We have “evolved” a segmented approach to sales and marketing based on the belief that we may have the ability to serve both the Direct Reduction (DR) steel making market from Lodestones resources and the Blast Furnace (BF) steel making market from both our resources and Lodestones resources. The DR market, where reduction of iron oxide to iron metal is achieved by reformed natural gas, requires very high quality lump ore or concentrates. The concentrates are usually agglomerated into pellets prior to entering the DR process. Only Vale amongst the big four can consistently supply large quantities of such high quality fine ore concentrates and then only as energy disadvantaged haematite. It requires four times more energy to make DR pellets from haematite versus magnetite concentrates. Test work to date indicates an ultra high-grade magnetite concentrate ideal for the DR market segment, can be produced from the Olary resources.
The epicentre of DR steel making is the Middle East and North Africa (The MENA area). New demand for DR quality concentrates in the MENA region is likely to grow by 30 to 50 million tpy in coming years. An entry to this market segment from which three of the big four are essentially excluded is imperative for our Company’s future. It is important to note that not all magnetites can serve this market. Sino Iron cannot. Karara cannot. Savage River cannot. Iron Bridge and Iron Road will not be able to service this market. They simply cannot produce the requisite quality product. Not all magnetites are created equal. The typical magnetite concentrate in global trade and in China is 66% Fe or less. Initial testing indicates that Olary’s DR product can be as high as 70% Fe and our BF product can exceed 68% Fe. The indicative quality of these products is very attractive to steel producers. Premiums for products such as these are currently significantly higher than the Pilbara 62% Fe sinter fines benchmark price. In the blast furnace (BF) steel making area where the iron oxide is reduced to molten iron by carbon (predominantly in the form of coke) the largest proportion of the iron ore feed comprises sintered fine ores and concentrates. Sintering is a process whereby these fines and concentrates are mixed with a carbon source (usually screenings from the coke plant) and set alight with an air blast to create a fused (sintered) mass that can be fed to the BF process. Advances in the preparation of feed to sinter plants now allows the use of a significant percentage of fine concentrates in the sinter blend whereas previously this was not possible. Lodestone has been a pioneer advocate of the merits of this application and market segment.
STRATEGIC PARTNERS We are asked very often: “If your product is so good, how come steel makers are not lining up to become your strategic partners?” Without pretending to know the complete answer to this question, I can comment as follows: In the BF steel sector there remains a perception of an oversupply of iron ore albeit a significant proportion of that supply is of a lousy quality. The Chinese BF steel makers dominate world steel capacity and the Chinese capacity is dominated by state owned enterprises that are forbidden to invest in overseas iron ore mines at the moment because of poor outcomes in the recent past. Russian and American steel makers are largely self sufficient as are Indian. European Steel makers largely source their iron ore in the Atlantic basin. Thus their interest in strategic partnering is very low. The predicted short fall in DR quality product may make investment in DR concentrate capacity in the Mawson Iron Province attractive to Middle East steel makers. That is where we are focused - without ignoring other possibilities such as private Chinese Steel Companies and infrastructure development companies.
Gordon Toll EXECUTIVE CHAIRMAN