Chinese demand fuels Consolidated Thompson decision

Consolidated Thompson Iron Mines (CLM-T) is set to push ahead on a plan to double iron ore production at its Bloom Lake project in Quebec.

The Montreal-based company says its board and the board of WISCO — its Chinese partner at the project — have “enthusiastically” endorsed the findings of a feasibility study that outlines the economics of taking the project to 16 million tonnes of iron ore concentrate per year from its current 8 million tonnes per year configuration.

The company will have to spend another US$525 million to expand the mine but says that funding will not be an issue, thanks in large part to the strong demand for iron ore in China.

CLM will start construction of the expansion in the third quarter of this year with the heftier production levels slated to be coming out precisely two years later.

The decision to go-ahead comes at a time when commodity markets are falling on fears that the global economic recovery may not have such a sturdy foundation. But the company’s executive chairman, former Newfoundland & Labrador Premier Brian Tobin, said on a conference call that the company is taking a broader view.

“There’s no question that looking at the market place today there is high volatility for base metal and commodity prices,” Tobin said. “We recognize and acknowledge that but we have to do what’s right in the medium and long term for our shareholders and that means having a growth profile that meets a market place that is hungry for iron ore.”

Tobin said the board’s unanimous decision to move up to 16 million tonnes was also helped by a rate of return on capital that was “very, very attractive” according to the study.

Indeed the study outlined some robust numbers with a pre-tax internal rate of return (IRR) of 50.7% and a net present value (NPV) of US$1.94 billion using a 10% discount rate. It also estimated a payback period of just 1.9 years

Total life-of-mine operating costs were estimated at US$31.08 per tonne of concentrate.

With those kind of numbers, and assurances from its Chinese partner that the extra iron ore would be gobbled up, CLM has already ordered a second autogenous mill and expects it to arrive later this summer.

WISCO has the right of first refusal on 60% of production on the original 8 million tonnes of production. It exercised its right on 50% of the production at market rates.

CLM’s president and chief executive Richard Quesnel said he expects the company will take “the same if not more” of the additional 8 million tonnes of production.

“The market test (for making the decision) is the fact that WISCO stepped up with us,” Tobin added. “They seconded the motion to move to 16 million tonnes without delay. They put up their hand and said ‘we want more offtake’ and we will conclude (a new offtake agreement with WISCO) in the weeks ahead.”

WISCO holds 19.9% of CLM’s outstanding shares and has a 25% stake in the Bloom Lake project specifically.

But with all the talk of future production the company’s recent production achievements could get lost in the shuffle. CLM recently announced the sale of 250,000 tonnes of iron ore which is to be delivered this month under a confidential purchase agreement.

Beyond its off-take agreement with WISCO which accounts for 4 million of the 8 million tonnes of production, the company has already secured off take agreements with two other companies for the remaining 4 million tonnes.

Those agreements all guarantee CLM fair market prices, which Quesnel said will likely come in at around US$112 per tonne in the coming months.

As for where the extra tonnage will come from for the expanded operation, Quesnel said between the already constructed main pit and a planned West Extension Pit, the project will be able to provide the ore over a 23 year mine life.

The project currently has a 17-year mine plan but that doesn’t take into account any reserve additions what will come from the West Extension pit, which currently only host a measure and indicated resource.

Quesnel said those resources will soon be upgraded to the reserve category as the company has an 11,000 metres drill program planned for the summer.

Bloom Lake currently has measured and indicated resources of 826.9 million tonnes grading 29.35% iron.

The proven and probable reserve within the outlined open pit comes in at 579.6 million tonnes grading of 30% iron based at a cut-off grade of 15%. The stripping ratio is estimated to be 0.97:1.

Bloom Lake sits in the Normanville Township of Quebec near the border with Labrador. The deposit is on the south end of the iron-rich Labrador Trough roughly 10 km north of the Mount-Wright iron ore mine, which is run by Arcelor Mittal Mines Canada.

In Toronto on May 26 the company’s shares were up 13¢ to $7.77 on 2.7 million shares traded. The company has 230 million shares outstanding.