U.S. steelmaker Nucor Corp. is in talks to invest in Cliffs Natural Resources Inc. ’s Bloom Lake iron-ore mine in Canada, according to a person familiar with the matter.
Two Japanese steel companies would also join the venture, the person said, with an eye to more than doubling production at the Quebec mine, which has troubled Cliffs as iron-ore prices have slumped badly.
The total capital expenditure required to boost output to 13.5 million tons a year would be $1.2 billion.
The three steelmaking partners, along with Wuhan Iron and Steel Co., an existing partner, would buy the iron ore produced at the mine.
The partnership would allow Cliffs to make the mine profitable despite the 40% drop in iron-ore prices in the past year, say executives.
Earlier this month, Cliffs took a $6 billion write-down, mostly related to Bloom Lake, leading to a third-quarter loss of $5.9 billion. Its share price has declined by more than 60% in the past year.
Cliffs is seeking to retool as it faces declining prices for its core product, iron ore used to make steel. The Cleveland-based company also in a transition after a board coup this year orchestrated by activist hedge fund Casablanca Capital LP, resulting in Lourenco Goncalves taking over as chief executive in August.
Like other miners around the world, especially in Brazil and Australia, Cliffs faces the challenge of running iron-ore mines in a market racked by oversupply and easing Chinese demand. Major miners BHP Billiton PLC, Rio Tinto Ltd. and Vale SA have already invested in higher production. The iron-ore market is expected to be oversupplied by over 300 million tons by 2018.
A veteran metals executives from Brazil, Mr. Goncalves wants to refocus Cliffs’s business around five iron-ore mines in Michigan and Minnesota, which sell to Midwestern steel mills that service the U.S. auto industry. The company has hired bankers to sell iron-ore assets in Australia, and is also looking to sell coal mines in West Virginia and Alabama.
Mr. Goncalves has said he is seeking partners to invest in Bloom Lake, which he has called the company’s “problem child.”
Cliffs acquired the controlling stake in the mine when it expanded in Canada by buying Consolidated Thompson Iron Mines Ltd. in 2011 for $4.9 billion, just around when iron-ore prices were peaking at over $185 a ton. The plan was to ship the ore to China. Now, because of oversupply and a softening in Chinese demand, prices are down at around $80.
Costs at Bloom Lake, including operating expenses, were $106.3 a ton in the third quarter. That division lost $165 million in the first nine months of 2014, after losing $52.3 million over the same period in 2013.
Mr. Goncalves told analysts Tuesday that if developed with partners, Bloom Lake could produce 13.5 million tons of “high-quality” iron ore a year at a cost “in the low $50 per ton range.” The iron ore, he added, “is in a different class, well above the typical iron ore shipped by the Australian majors to China.”
Nucor, based in Charlotte, N.C., has increased the amount of iron it uses in its furnaces, which typically rely on scrap. As iron-ore prices decline, iron in the form of pellets is becoming an attractive substitute for scrap. Nucor recently launched a new plant in Louisiana to produce iron pellets.
On Tuesday, Mr. Goncalves told analysts that Bloom Lake could produce the “ore of choice” for the same type of pellets Nucor needs.
Nucor CEO John Ferriola told analysts last week that he was “certainly” interested in “potential acquisitions and opportunities” to invest in more iron-ore production. “Is the environment today a whole lot better than it was four years ago? Absolutely,” he said.
Source: the Wall Street Journal
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