Cliffs Natural Resources (NYSE:CLF) recently bought a magnetite ore project in Western Australia, Yerecoin, from Atlas Iron for close to $18 million in cash. Atlas Iron acquired the Yerecoin project during its acquisition of Giralia Resources earlier this year. Cliffs will carry out further studies in the region and set up a mine, which will probably have a capacity of about 2.5 million tons of iron ore pellets per year. The actual production capacity at the mine may vary according to market demand.  Cliffs is the largest producer of iron ore pellets in North America and a major supplier iron ore out of Australia, competing with other international mining and natural resources companies such as Vale (NYSE:VALE) and Rio Tinto (NYSE:RIO).
The Yerecoin project
Initial scoping studies of the Yerecoin magnetite project laid out plans to develop a mine site with a capacity of 2.5 million tons per annum of blast furnace grade iron ore pellets.  Blast furnace grade pellets consist of approximately 68% iron and less than 4.5% silicon dioxide. According to studies carried out by Atlas Iron, the richness of the ore present in the region will allow them to grind it into a much coarser specification in order to achieve the blast furnace grade iron concentration in the ore pellet. Coarser grinding means easier processing of the ore and lower operating costs. The initial estimate of the project’s production cost is $55 per ton. Moreover, the proposed mine is located less than a mile away from an existing commercial railway line, providing easy access to the nearby seaports.
$18 million now, royalties later
The region is estimated to contain about 200-250 million tons of minable iron ore deposit. Under the terms of the acquisition, Cliffs will pay Atlas $18 million in cash initially and an undisclosed amount as a royalty later when it commences production. Cliffs has also agreed to additional cash compensation for Atlas should the proven and probable resources in the region exceed the initial estimates. With the investment in the project, it takes the Cliffs’ tally of iron ore mining complexes in Australia to three.Notes: