Investors Give Iron Juniors the Cold Shoulder

Investors Give Iron Juniors the Cold Shoulder

Junior miners in the iron ore space continue to have a tough time getting attention from investors. Take, for example, Champion Iron Mines (TSX:CHM). On January 9, the company announced an updated estimate that doubled the measured and indicated resources at its Consolidated Fire Lake North project in Canada’s Labrador Trough, also boosting inferred resources by 10 percent.

The response? The stock got a short-term lift, from $0.72 to $0.76, then plunged. Champion is now trading at around $0.43.

“We have come out with a positive prefeasibility study that was well received generally by analysts and industry players,” wrote Champion’s president and CEO, Thomas Larsen, in a February 13 email. “However, there is still a disconnect, with institutional and retail investors questioning whether Champion can finance these projects [mine and rail]. This is a short-term view, and those investors that can transcend cycles and take a longer-term approach see the true value and the fact that we will be able to bring financial partners to the table due to the project’s economic robustness.”

Outside the Labrador Trough, West Melville Metals (TSXV:WMM) announced an encouraging resource estimate at its Isortoq iron-titanium-vanadium project on the coast of Greenland on January 14. The stock has since declined from $0.24 to $0.18.

“The market has a difficult time understanding this project,” said West Melville CEO Rory Moore in a February 13 phone interview. “The metallurgy is more complex, which makes it hard to compare to pure iron ore projects. This doesn’t concern us, though, because we see up to 1 billion pounds of in-ground potential. We’ve derisked it by drilling a small portion of the strike length, and based on a modest drilling program, we’ve announced an inferred resource of 70 million MT at a consistent grade. Because of the grade consistency, we can rapidly expand the resource quickly and cheaply.”

Rising costs, railway delay offset improving iron ore price

These share-price declines seem particularly unusual in light of the sharp rise in iron ore prices in the past six months. Benchmark iron ore (with 62 percent metal content) plunged to a three-year low of $86.70 per MT in September, but has rebounded strongly since. Prices are now around $150 per MT.

“Prices have remained surprisingly strong, particularly given the Chinese New Year,” said Wojtek Nowak, a research analyst with Fraser Mackenzie, in a February 12 phone interview. “Mills are restocking, and the supply/demand situation looks good.” China consumes roughly 65 percent of the world’s total iron ore exports. The first five days of the country’s Lunar New Year are holidays.

However, Moore feels the recent instability is no doubt weighing on sentiment. “I think the volatility certainly scared investors,” he said. “In general, I think most of the ‘risk money’ is on the sidelines right now.”

Rising costs at producing mines are also fueling investor pessimism: “There is also negative news from Cliffs Natural Resources (NYSE:CLF), which is finding cash costs to be quite high at its Bloom Lake project,” said Nowak. “That’s creating doubt as to the competitiveness and profitability of all these projects, which is too bad, because everyone is being painted with the same brush.”

Nowak sees both macro and company-specific issues affecting the sector at the moment. “On the macro side, the latest news is that Canadian National Railway (TSX:CNR,NYSE:CNI) has deferred a feasibility study of a railway [in the Labrador Trough] indefinitely.”

Rail is key to the development of projects in the remote region, where much of the necessary transportation infrastructure is either missing or unable to handle the expected rise in production from new projects. CN had proposed building an 800-kilometer line linking the region to the port of Sept-Îles. But the company put the feasibility study on hold on February 12.

“A joint review of the project, together with the mining companies, indicates that mine construction schedules and diverging needs for each specific individual project will make it difficult to obtain the critical volumes of iron ore necessary to support the building of new rail and terminal infrastructure by CN,” the company said in a press release.

“I expected [the CN announcement], and we are working closely with the government and other financial partners towards a new multi-user rail solution,” wrote Larsen. “We had a $2.5-million study completed by Rail Cantech last year on a direct route to our Consolidated Fire Lake North area from the Point Noire wharf in Sept-Îles. We have reopened that file, which was in our prefeasibility study, and it proves to be the most cost-effective solution.”

Cap-Ex Ventures, (TSXV:CEV) which is targetting a 7.3 billion-tonne iron resource in the Labrador Trough, said last week’s decision by CN does not preclude other project partners from coming forward to finance a common rail solution.

“We believe that many mining companies shared similar needs in terms of transportation and port handling solutions,” said François Laurin, Cap-Ex President and CEO, in a Feb. 15 interview with Iron Investing News. He added: “Even the Caisse de Dépot publicly stated in the CN press release that it remains open to participate with an experienced operator for such a solution to develop the resources in North of Quebec.”

Strong management, controlled costs will help iron juniors get back in the game

The key challenge for juniors is attracting investor attention in this environment. Nowak believes companies with strong management and well-controlled costs will be the standouts.

“I believe the game has changed from resource definition towards project execution and financing,” he said. “Thus, it becomes important to have a very competent team that can execute a project, a simple logistics solution, as well as compelling economics that include a reasonable capex number and competitive cash costs.”

“Investors are hesitant to step in due to skepticism regarding the economics of projects, the direction of the iron ore price and ability to finance large capex figures,” he adds. “I believe that a good way to de-risk a project in the eyes of investors is to line up a cash infusion from a strategic investor/joint venture partner. This helps to validate a project and remove balance sheet concerns.”

Juniors focus on spreading the word

For its part, Champion continues to focus on increasing awareness of its progress, with a focus on overseas investors: “We have a marketing campaign operating continuously in Europe, with three or four qualified consultants getting the Champion story out to European investors. I would guess that 40 percent of our shares are held in foreign hands,” wrote Larsen.

Moore, too, has been aggressively pushing to get his company’s story out. “I’ve been hitting the road pretty hard, talking to analysts and anyone who will meet with me, and we’ve hired an investor relations company to help put us in touch with investors. I’ve also been attending conferences and doing speaking engagements. All of this has been good in terms of putting us on the map,” he said.

 

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.