Cliffs Natural Resources (NYSE:CLF) exuded optimism at the Prospectors and Developers Association of Canada (PDAC) conference about its ability to start production from chromite projects in the Ring of Fire area in Ontario, Canada, by 2016. The company acknowledged the staggering political, environmental and infrastructural challenges that it needs to overcome before production can begin. The management stressed that it is making progress in each of these areas in order to achieve its goal of beginning production in 2016. 
The company’s chromite properties are located approximately 155 miles north of the town of Nakina and about 50 miles east of the First Nations community of Webequie. It has a controlling position in three chromite deposits that occur in close proximity to each other– a 100% interest in each of the Black Label and Black Thor chromite deposits and a 70% interest in the Big Daddy chromite deposit. Cliffs has completed a pre-feasibility study on the Black Thor deposit, the largest of the three deposits, and is currently working on a feasibility study to be completed by mid-year 2013. 
Black Thor is likely to be the first project to go online. The various factors expected to contribute to delay here are the building of a 350 km long all-weather road from the main railway line to the mining site, construction of a 300 MW(megawatt) smelter near Sudbury to process the ore, negotiations over electricity prices, and negotiations with local communities called First Nations who have apprehensions about the project. 
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Potential Of The Chromite Mines
The Ring of Fire region is thought to hold up to $50 billion worth of minerals and is going to be North America’s first major source of chromite.
Black Thor alone is expected to produce 600,000 tonnes of ferrochrome once production begins, hopefully in 2016. The company will be spending close to $3.3 billion on this project as capital expenditure. Ferrochrome is used mostly in the production of stainless steel and there are very few mines in the world with large deposits of chromite from which it is made.
Status Of Cliffs’ Progress
In face of so many hurdles, progress towards construction has been very slow. But, according to Cliffs, many of these challenges are finally on the verge of being overcome.
The feasibility study on Black Thor is on schedule and is expected to be completed later this year. The company is keen to bring in more partners into the project to share capital cost and risk. Any meaningful discussions are only expected to begin once the feasibility of the project has been established.
Another area where Cliffs claims to be making progress is in its talks with the First Nations communities. First Nations are autonomous aboriginal communities who live in the adjoining areas and are concerned about jobs, business opportunities and improved infrastructure. Due to the diverse natures of these communities and wide-ranging concerns, progress has been slow and negotiations complicated.
An area where progress has been relatively tardy is the signing of a definitive agreement between the company and the Ontario government. The provincial election and subsequent leadership changes have slowed down the process and the two sides are yet to get back to the negotiating table. In the absence of an agreement, production cannot begin.
Why Are Chromite Projects Important For Cliffs?
Cliffs Natural is heavily dependent on the iron ore business. Unlike companies like Rio Tinto, BHP Billiton and Vale, it is not a well diversified mining company. Also, since it doesn’t enjoy economies of scale like these companies do, its cost of production is higher. Tumbling iron prices thus affect it much more than for larger, more diversified players. Cliffs suffered a setback in 2012 due to plummeting iron ore prices which dented its profits and cash flow and resulted in heavy impairments worth $2 billion. It even had to slash the dividend payout substantially. In addition, the company’s North American iron ore and coal divisions’ revenues are highly dependent on a few customers. ArcelorMittal, Algoma and Severstal together constitute about 35% of Cliffs’ total revenues. A loss of sales to any of these existing customers could have a substantial adverse impact on the company’s revenues and profitability.
All of these factors point to an urgent need for diversification which the chromite business can provide.
An additional complication is that the capital to be deployed is scare and other projects are competing for it. For instance, Rio Tinto is looking to sell its Labrador Trough operations, and Cliffs is one of the only two logical buyers in the market. If the company decides to bid for the same and wins, it would make it harder for it to finance the Ring of Fire projects.
Our price estimate for Cliffs Natural Resources is $46, which will be revised shortly in view of the fourth quarter earnings results.Notes: