Cliffs Natural Suspends Chromite Project Indefinitely

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Cliffs Natural Resources (NYSE:CLF) has finally decided to suspend the Ring of Fire chromite project in Canada’s Ontario province for an indefinite period of time. The company will stop all activity on the project by the end of this year. The decision doesn’t come as a surprise because the company had indicated last month that in view of the difficult conditions placed on the project by the government, it had been put in jeopardy. The project had been repeatedly delayed and pushed back by Cliffs over the last one year and now stands suspended. We don’t expect much impact on Clif’fs’ stock price as the suspension is already being factored into the market price in our opinion. [1]

With the Ring of Fire project now suspended, Cliffs will not allocate additional capital for it in view of the uncertain timeline and risks associated with the development of necessary infrastructure to bring this project online. All the technical project work including feasibility study, development and exploration activities will now be halted. In June this year, Cliffs suspended environmental assessment activities because of issues pending with various regulatory bodies.

Despite the suspension, Cliffs says that it will continue to work with the government of Ontario, First Nation communities and other stakeholders to explore potential solutions to the issue of infrastructure for the project.

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Our price estimate for Cliffs Natural Resources is $32, which represents 20% upside to the current market price.

See Full Analysis for Cliffs Natural Resources Here

The Reasons Behind Suspension

The Ring of Fire project has been very unpopular with the First Nation communities in Ontario. These 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 had 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 were deemed critical to the project’s economic viability. In view of these problems, Cliffs had put the project on hold temporarily in June. [2]

In September, Ontario’s land and mining commissioner had 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 rival miner KWG, which wants to build a railroad instead. The region is too fragile to support two heavy ore transportation systems. While Cliffs proposed a $600 million road, KWG proposed a $1.6 billion railroad. However, the province of Ontario was 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. [3]

The company claimed that building an all-weather surface road was the only way to make its $3.3 billion project viable. In view of the adverse ruling, it declared that the project had been put in jeopardy. Although Cliffs appealed against the ruling in Ontario’s Superior Court  of Justice, it is aware that any appeal takes years to make its way through the court. The company continues to believe that a real solution can only be found by the Ontario government.

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 and had already spent around $500 million by the end of 2012. 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. 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. [4]

The suspension of the project implies that Cliffs will now invest more resources in other ongoing projects such as the Bloom Lake mine in Canada. Also, according to assumptions listed by the company in its latest available Investor Day presentation, the price of ferrochrome required for an internal rate of return (IRR) of 14-17% is $1.4/pound. However, the price today is close to $1 per pound so the project’s economics is currently not favorable. Had the project been given a go-ahead, it might have made it difficult for Cliffs to justify to shareholders why they were not using that money elsewhere. Hence, for all we know, the suspension of the chromite project may be a blessing in disguise for the company at this point. [5]

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Notes:
  1. Cliffs Natural Resources Inc. Announce Plans to Halt Development of its Chromite Project Indefinitely, Cliffs Natural News Release []
  2. Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues, Cliffs News Release []
  3. Road to Ring of Fire nixed, The Chronicle Journal []
  4. GUEST OPINION: Ring of Fire: Strategic Chromite and the Commodity Supercycle, Canadian Mining Journal []
  5. Investor Day Presentation July 2012, Cliffs Website []