Cliffs Natural Resources (NYSE:CLF) has been dealt a massive setback at its Black Thor chromite project in the Ring of Fire region in Ontario, Canada. Ontario’s land and mining commissioner has dismissed Cliffs’ application for permission to build a road to its deposits at Black Thor. This road was proposed to pass through a region claimed by a rival miner KWG, which wants to build a railroad instead. The region is too fragile to support two heavy ore transportation systems. While Cliffs proposes a $600 million railroad, KWG has proposed a $1.6 billion railroad. However, the province of Ontario is expected to share half the cost of building Cliffs’ proposed road. The tribunal objected to the province paying for a private road that would bring no benefits to the general public. 
The adverse ruling has put the fate of Cliffs’ Black Thor project in jeopardy, as a Cliffs spokesperson admitted. The company has claimed in the past, that building an all-weather surface road is the only way to make its $3.3 billion project viable. Due to uncertainty over granting of surface rights, it had put the project on hold in June earlier this year. We think that the adverse ruling, combined with the company’s stretched finances, ongoing uncertainties over the environmental assessment process and a stalemate with the First Nations communities, could even force the company to abandon the project. 
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 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. Iron ore prices in 2013 are faring a little better but are expected to bottom out over the next 203 years. ((Australia predicts fall in iron ore price, Financial Times))
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 accounted for 62% of Cliffs’ U.S. iron ore revenues in 2012. 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.
Cliffs’ Chromite Properties
Cliffs’ 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 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. However, the Ring of Fire deposits are located in a very remote region that has no railroads, highways or electrical power.
In 2012, Cliffs had already completed a pre-feasibility study on Black Thor, the largest of the three deposits, and had been working on a feasibility study which was scheduled for completion by mid-2013. 
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 if and when production begins. Cliffs has a capital expenditure budget of close to $3.3 billion for this project. 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. Also, Canada is the only potential large scale supplier which is politically stable, doesn’t need chromite for its own consumption and can produce it at low costs. 
Black Thor Put On Hold In June
The issues surrounding the project have proved intractable. Cliffs had been forced to delay the timeline for production commencement to 2017 from 2015. Finally, the project was put on hold in June which means that no guidance on timeline is available now.
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 nature of these communities and their wide-ranging concerns, progress has been slow and negotiations complicated. Another area where progress had been tardy is the signing of definitive agreements between the company and the Ontario government. These agreements pertain to the lack of infrastructure in the Ring of Fire area and are critical to the project’s economic viability. In the absence of an agreement, production cannot begin. Other reasons for the suspension were a delay in approval of the Terms of Reference for the provincial environmental assessment process and unresolved land surface rights issues following a February 2013 Mining and Land Commissioner hearing. The ministers in the government had refused to commit to a time period to conclude negotiations. ((Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues, Cliffs News Release))
Cliffs Natural’s Options
Cliffs’ could try to negotiate a solution with KWG or buy the company outright. The latter has a market value of $38 million while Cliffs is worth $3.6 billion. Right now, Cliffs is facing headwinds in the iron ore business with cost of production rising in face of low prices, and its balance sheet is stretched. Therefore, an acquisition may be the last thing on the management’s mind at the moment.
As far as the latest verdict is concerned, if Cliffs doesn’t appeal the ruling it will have to pay $1 million to KWG as compensation for costs incurred by the latter in fighting Cliffs’ application at the tribunal. If Cliffs appeals the ruling, the case would go either to the Ontario Superior Court of Justice or through a judicial review. It could take as long as five years for those appeals to work their way through the courts. All work would remain suspended for the period. Thus, there seem to be no good options available to the company. We think that the best course of action would be to negotiate a solution with KWG. 
Even if Cliffs somehow manages to overcome this roadblock, its troubles would be far from over. There has been little progress on issues which led to project suspension in June.Notes:
- Road to Ring of Fire nixed, The Chronicle Journal [↩]
- Cliffs Natural loses on Ring of Fire highway route; may appeal, Reuters [↩]
- Cliffs Natural Resources 2012 10-K, SEC [↩]
- GUEST OPINION: Ring of Fire: Strategic Chromite and the Commodity Supercycle, Canadian Mining Journal [↩]
- Rail best option for Ring of Fire, union says, Nugget.ca [↩]