Traditional iron ore producers in Australia and Brazil are investing heavily to grow their production to meet surging Chinese demand and maintain their dominant position in the industry. But a huge amount of new African iron ore is targeting the market as well. By RBC Capital Markets’ calculations, planned African projects total at least 500 Mt/y, at an all-in capital cost of over $50 billion over the next eight years. “Not all these projects will get built,” RBC cautions.
“Chinese iron ore demand growth may be slowing, but imports are expected to continue to grow in part due to declining grades of domestic production. As such, China will be the likely destination for much of the new African iron ore supply over the coming years. The majority of production from many African projects is likely to be pellet feed product, which has traditionally been a niche product. With a diversification by Chinese buyers away from traditional producers in Australia and Brazil, the importance of these African projects could increase.”
RBC notes that “infrastructure plans can be as important as asset quality” and says “aside from project size, we look for the following key attributes in African iron ore projects:
Direct Shipping Ore (DSO) potential. Most African projects are relatively lowgrade magnetite, but some include weathered caps which could result in directly shippable products, materially improving project economics.
Infrastructure solution. Projects with shorter required rail or haulage routes would not only have lower capex, but also shorter lead times to come on line.
In-country stability agreement. Several companies have secured long-term in-country Mining Conventions, establishing the taxation, royalties, and general terms under which their projects will be governed. Most African countries we have analyzed have supported investment in iron ore. Nonetheless, a signed stability agreement is a vote of confidence.
Financing partner/off-take agreement. In many cases, capex for these projects is in the multi-billion dollar range. Companies that have signed on partners to help finance or purchase off-take from their projects have an advantage in our view. Of course the flipside is that companies that haven’t yet signed on partners could have significant upside if/when they do.”
RBC has analysed over 40 projects in Africa (ex South Africa) and summarised the key attributes of the projects which it believes have the greatest potential to become large-scale producers, owned by companies including: African Iron, African Minerals, Bellzone Mining, Cape Lambert Resources, Core Mining, Equatorial Resources, London Mining, Sundance Resources and Zanaga Iron Ore Co, among others.
