Champion Iron (TSX: CIA; ASX: CIA) is taking advantage of the commodities crash to snatch the shuttered Bloom Lake iron ore mine in the Labrador Trough for a fraction of its previous purchase price.
Champion has agreed to buy the mine and related rail and mineral assets in Quebec from creditors for $10.5 million in cash, as iron ore prices sink below US$40 per tonne owing to oversupply and slumping Chinese demand. The company will also assume environmental obligations, including $41.7 million in reclamation liabilities, and the replacement of $1.1 million of bonds.
Champion chair and CEO Michael O’Keefe describes Bloom Lake as an “exceptional opportunity,” and notes that the tough market conditions helped it negotiate a competitive bid.
Four and half years ago, Cliffs Natural Resources (NYSE: CLF) paid $4.9 billion to pick up Bloom Lake as part of its pricey acquisition of Consolidated Thompson Iron Mines. At the time, iron ore traded at a high of US$180 per tonne due to rising demand from China, the world’s largest steel-maker and iron ore consumer.
But Bloom Lake failed to perform as expected, with Cliffs reporting operational challenges and quarterly losses, amid softening iron ore prices.
In the third quarter of 2014, Cliffs took a $5.7-billion, non-cash write-down — mainly for its ill-timed Bloom Lake acquisition.
At that time it couldn’t find a minority partner to help expand the mine and the troubled miner halted production at the end of 2014, as part of a strategy to divest its Eastern Canadian iron ore assets.
To avoid the hefty closure costs at Bloom Lake — up to $700 million over five years — it put the mine and its other Canadian assets into creditor protection in January 2015.
During the bidding, Champion said it “gained significant insight and confidence” in Bloom Lake. It has devised a mine plan to increase annual capacity from 6 million tons of iron fines at 66% Fe to over 7 million tons at similar grades, while improving recoveries.
Champion says it could also reduce operating costs, without specifying. In the last quarter of 2014, Cliffs reported cash production costs at Bloom Lake of $81 per tonne.
While Champion notes commodity traders and steel-makers are interested in signing offtake agreements for production at Bloom Lake, it is trying to raise up to $25 million in a private placement to fund the acquisition and its working capital. Two companies, including one controlled by O’Keefe, will raise $15 million of the financing. This will bring O’Keefe’s stake in the company to 19.95%.
As a contingency, Champion will also look to raise more funds to cover Bloom Lake’s care and maintenance costs for up to 24 months, adding it could possibly lower the mine’s holding costs.
The company did not return requests for comment at press time.
The transaction, subject to court approval, could close in early 2016.
On the acquisition news released on Dec. 11, Champion shares rose 30% to 19.5¢, before closing Dec. 14 at 17.5¢.