The head of Cape Lambert Resources is probably ruing the day he described West Africa as the new Pilbara. Last year’s precipitous fall in iron ore prices has had a devastating impact on junior miners across the globe, but nowhere has it been more overwhelming than West Africa, a region that has had to contend with the deadly Ebola virus as well.
In Sierra Leone, London Mining and African Minerals were the country’s two biggest contributors to GDP until they collapsed last year. Their demise has also been felt in China, which has been diversifying its iron ore supplies away from Australia and Brazil. By the end of 2014, Sierra Leone had become China’s fifth largest source of iron ore, with Africa as a whole jumping from 3.9% of total imports in 2008 to slightly under 9% by 2014. But the risks of operating on the continent have become evident too.
West Africa’s biggest failure to date has been the closure of African Minerals’ Tonkolili mine. According to Reuters the AIM-listed firm wound down production in December after defaulting on a $250 million pre-export financing facility and failing to reach a restructuring agreement with its Chinese partner Shandong Iron and Steel (Shan Steel). In April 2012, Shan Steel paid $1.5 billion for a 25% stake in the Tonkolili project, African Minerals’ sole asset. In return, the company agreed to a discounted off-take deal with the Chinese state firm.
During phase one of the project African Minerals agreed to supply two million tonnes per annum (mtpa), rising to 10 mtpa at discounts of up to 15% once phase two was commissioned.
By June 2014, Shan Steel and China Railway Materials, a shareholder of African Minerals, were taking 72% of the Tonkolili mine’s output. However, the partnership was under strain even before iron ore prices started falling.
African Minerals was forced to pay Shan Steel $51.1 million in commercial penalties during 2012, $44.3 million in 2013 and a further $5.7 million in the first half of 2014 for failing to meet its obligations.
Production at the mine had ramped up to 12.1 mtpa by the end of 2013, but it was not as quick as expected and in 2014 it ran headlong into collapsing ore prices (which nearly halved in 2014).
The company cut its extraction costs down to $39 per tonne by the first half of 2014 from $43 per tonne a year earlier. Still, it ran into an operational loss as sizeable amortisation expenses also began to kick in.
A proposed investment by yet another Chinese state firm Tianjin Materials also fell through. The previous September the Chinese conglomerate had agreed to pay $990 million for a 16.5% stake in the company, valuing it at $6 billion.
Unable to meet the $10.4 million monthly repayment schedule of its pre-export finance facility, African Minerals turned to Shan Steel, hoping it would release funds earmarked for future expansion. Instead, Shan Steel bought the $167 million outstanding debt from African Minerals’ lenders and demanded immediate repayment.
As the facility is secured against the mine’s assets, Shan Steel is now seeking full control. If it succeeds, the Chinese firm will gain access to one of the world’s largest magnetite iron ore finds (12.8 billion tonnes of resources as of 2012).
Whether Shan Steel will emerge a long-term winner remains to be seen, however. African Minerals had previously been optimistic of reducing its extraction costs below $30 per tonne after starting to produce higher margin iron ore concentrates. That may not be enough.
That’s because the big miners are now expanding production. By further driving down prices they hope to squeeze out less cost-efficient rivals. Rio Tinto, for example, plans to increase production from 302 mtpa to 350 mpta this year. Analysts believe that Rio and BHP Billiton can both bring their costs below $15 per tonne within the next 18 months. (Rio is almost there already after reporting a figure of $17 for the second half of 2014. BHP was only slightly higher at $20.40.)
Meanwhile, African Mineral’s chairman Frank Timis lives to fight another day after purchasing London Mining for $20 million. The acquisition of a neighouring mine in Sierra Leone last November raised attention when it became clear the deal had been executed through his privately-held company rather than African Minerals. Subsequent events soon showed why. As one mining blogger put it, “Frank could see the writing on the wall.”
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