Champion Iron optimistic at Bloom Lake

Champion Iron (TSX: CIA; ASX: CIA) is lowering projected costs at the recently acquired Bloom Lake iron ore mine in the Labrador Trough, as part of a plan to restart the operation when prices for the steelmaking metal improve.

Champion — led by Australian mining tycoon Michael O’Keeffe — closed the $10.5-million acquisition of the Bloom Lake assets and the Quinto claims on April 11, four months after its subsidiary, Quebec Iron Ore, agreed to buy them from affiliates of Cliffs Natural Resources (NYSE: CLF).

Michael O’Keeffe, Champion Iron chairman and CEO. Credit: Champion Iron

Since then, Champion has identified potential improvements at the high-grade iron ore mine.

The cost reductions aren’t finalized, but will improve mining, processing and transportation costs, O’Keeffe said in a June 6 interview.

The company is seeking tenders to finish a mine plan that would lower the stripping ratio. The new plan would also expand annual production to over 7 million tonnes of iron fines at 66% Fe, from 6 million tonnes previously. It’s also seeking tenders to upgrade the plant and improve recoveries to 80%, from Cliffs’ 68%.

Expected operating costs should improve by a dollar for every 1% increase in recoveries, O’Keeffe said.

Cliffs, he added, knew the processing plant that it acquired was designed “incorrectly” and planned to fix the recovery circuit in its costly phase-two expansion, as it could not afford to stop production due to its take-or-pay agreement.

“There is a huge amount of work done, and all the information is there to understand how the recoveries could get to 80% plus, and that was being implemented in phase two. All we’ve done is taken that plan and brought it back to phase one to say, ‘OK, we can stop and fix the circuit to get the recoveries where they should be,’” O’Keeffe said.

The quotes for the required work should be back in late June, with board approvals from Quebec Iron Ore and Champion to follow in July.

Once approved, O’Keeffe expects consultants will take until year-end to complete the mine plan and processing work. After that, the company will have a good idea of the required capital and cost structure to get Bloom Lake back online.

“We need to see a consistent iron ore price — above US$50 per tonne — (before) we can have the confidence to press the button and begin all the work,” O’ Keeffe said.

A mill at Champion Iron’s Bloom Lake iron ore project in Newfoundland’s Labrador Trough.  Credit: Champion Iron

Previous owner Cliffs paid $4.9 billion to buy the mine from Consolidated Thompson Iron Mines in 2011, when iron ore prices peaked at US$190 per tonne, before plunging below US$40 per tonne in December 2015. (Prices have since recovered to just below US$50 per tonne.)

Amid the slump in prices, in 2014 Cliffs took a $5.7-billion writedown for the acquisition and lost a proxy fight with activist hedge fund Casablanca Capital. The activist urged Cliffs to sell its Australian and Eastern Canadian iron ore assets, including Bloom Lake.

At the end of 2014, Cliffs halted production, after it failed to secure equity partners to complete Bloom Lake’s $1.2-billion, phase-two expansion to increase production and trim costs.

Visitors near a truck fleet at the Bloom Lake iron ore project. Credit: Champion Iron

In January 2015, it placed Bloom Lake and its other Canadian assets into creditor protection. At year-end, Champion’s Quebec Iron Ore subsidiary signed an agreement to buy the assets. It also became responsible for environmental reclamation liabilities, amounting to $41.7 million, and the replacement of certain bonds, totalling $1.1 million.

Quebec’s Superior Court approved the transaction in January. A month later, Ressources Québec, a subsidiary of Investissement Québec, agreed to invest $14 million in Quebec Iron Ore. As a result, it holds 36.8% of the subsidiary, with Champion holding the rest.

Quebec Iron Ore has $20 million in the bank, with O’Keeffe noting that Bloom Lake’s care and maintenance activities amount to $1.2 million a month.

Champion also raised $30 million in a private placement to fund the Bloom Lake transaction and provide working capital, as well as funds to cover its share of the mine’s maintenance costs. It has $15 million on hand.

The executive reveals he became interested in Bloom Lake in 2014 due to the quality of the material and uniqueness of the asset.

“The Labrador Trough has high-grade and very clean iron ore, 66% Fe, and very, very low diluents, especially phosphorous and alumina,” he says, adding Champion has already received interest for the product, particularly from Japan.

O’Keeffe became Champion’s chairman in August 2014, after it merged with his firm, Mamba Minerals. He took on the CEO role later that year. The former Glencore executive is best known for developing coal junior Riversdale Mining, once valued at A$7 million, into a firm that Rio Tinto (NYSE: RIO) bought in 2011 for A$3.9 billion.

Bloom Lake sits near Champion’s Fire Lake North iron ore project. It also broadly benefits from Quebec’s Plan Nord to help develop the province’s north.

The Quebec government has granted $20 million for the feasibility study of a rail linking the Fire Lake and Bloom Lake area to the port of Sept-Îles. The study should be completed later this year.