Iron Ore Slump Threatens $2 Billion Australian Mine

Karara mine

A view from Karara Lookout shows Gindalbie Metals Ltd.'s Karara Iron Ore Project, in Karara, Western Australia.

Photographer: Carla Gottgens/Bloomberg
  • Gindalbie plunges to record as Ansteel questions mine future
  • Iron ore tumbled in 2015 to a third straight annual decline

The plunge in the price of iron ore looks set to claim another casualty with Gindalbie Metals Ltd. questioning its future, as partner Anshan Iron and Steel Group Corp. considers withdrawing funds for their $2 billion mine.

QuickTake Iron Ore Wars

Anshan engaged a third party to assess the viability of its Karara iron ore mine in Western Australia amid the steel making material’s price collapse, according to a statement from Gindalbie. Shares in the Perth-based company slumped 57 percent to a record low of 0.9 cents in Sydney, giving it a market value of A$13.5 million ($9.4 million) compared with A$780 million at the end of the 2011 fiscal year.

The study into Karara, located about 200 kilometers (124 miles) east of Geraldton, “could cast doubt on Gindalbie’s ability to continue as a going concern,” the Australian producer said Tuesday in the statement. A decision “to withdraw funding support could lead to claims under various operating and financing guarantees against Gindalbie.”

Iron ore’s 39 percent slump in 2015 to a third straight annual loss has forced iron ore operations from Sweden to Canada to closeas demand growth falters in China and the lowest-cost exporters squeeze rivals by raising output. Some higher-cost producers that should have already exited the export market are “hanging on by their fingernails,” Sam Walsh, chief executive officer of Rio Tinto Group said in a December interview with Bloomberg Television.

‘Pain Needed’

BC Iron Ltd. is this month completing the suspension of its Nullagine joint venture with Fortescue Metals Group Ltd., Australia’s third-biggest producer, as a result of lower prices. China’s Baosteel Group Corp. and partners last month mothballed a project in Western Australia citing uncertainty about future supply and demand for iron ore.

The collapse, which saw iron ore bottom at $38.30 a metric ton on Dec. 11, a record in daily price data dating back to May 2009, will probably now spur closures of higher cost mines in Australia, the biggest exporter of the commodity, according to Mathew Hodge, a Sydney-based analyst with Morningstar Inc.

“Some of them should potentially go and that’s a positive, but we are only at the beginning,” Hodge said by phone. “While there’s that oversupply out there, the market needs more pain.”

Outside the four largest iron ore producers -- Brazil’s Vale SA, Rio, BHP Billiton Ltd. and Fortescue -- all other suppliers are “burning cash,” as a result of price declines, Citigroup Inc. analysts wrote last month in an e-mailed report.

Potential Options

Gindalbie has a stake of about 48 percent in Karara Mining Ltd. with Anshan holding the remainder. Anshan is also Gindalbie’s largest shareholder, with a 36 percent stake, according to data compiled by Bloomberg. Anshan’s Ansteel unit didn’t immediately respond to an e-mailed request for comment.

Anshan is considering potential options for Karara, Gindalbie said in its statement. The mine began exports in 2011. It shipped about 2.5 million wet metric tons of iron ore in the three months to Sept., according to an October filing.

Gindalbie has requested formal notification from Ansteel on its funding support for Karara and has yet to receive a response, the Australian company said in the statement.

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