Interview: Iron ore markets won’t quickly recover from Vale disaster, says Black Iron’s Simpson

In the following interview excerpt, iron ore expert Matt Simpson, co-founder and CEO of junior Black Iron (TSX: BKI; US-OTC: BKIRF), explains the new landscape for iron ore markets worldwide in the wake of Vale’s horrific tailings-dam disaster near Brumadinho in Brazil, which has resulted in 10% of the world’s iron ore pellet production being removed from the market.

Before heading up Black Iron, Simpson was mining manager at Rio Tinto’s Iron Ore Co. of Canada operations in Labrador — the largest iron ore mine in North America.

For the full interview listen to The Northern Miner Podcast – episode 134: Iron ore markets post-Vale disaster, Ukraine update ft Black Iron’s Matt Simpson, where Simpson gets into more detail on the mining scene in Ukraine and his firm’s new offtake-financing deal with Glencore (LON: GLEN) at the junior’s high-quality Shymanivske iron ore deposit in Ukraine.

The Northern Miner: There has been a tremendous change in the iron ore markets with the Vale disaster in late January. There are so many things going on with the iron ore markets. Where do you want to start?

Matt Simpson: I am happy to talk about what happened in Brazil and how that impacts the general markets. So on January 25, there was a horrific tailings dam failure at one of Vale’s iron ore operations in Brazil. And because of that failure, which is the second in about three years’ time — the first being the Samarco tailings dam failure — the Brazillian government required Vale to shut down about 11 of their operations, taking about 70 million tonnes of product of about 1.6 billion tonnes globally off-stream.

TNM: How permanent is that reduction?

MS: A lot of people are speculating that other companies such as BHP, Rio Tinto and Fortescue — who are the other large producers in the world — would simply ramp up production to offset the tonnage lost by Vale.

But quite interestingly over the last two weeks [ed. note: this interview was recorded on Feb. 28, 2019], there have been several year-end reports by those companies in which every single one has stated that they are running at maximum capacity — including just this week, Rio Tinto — and that they don’t have the ability to easily ramp up the displaced tonnes.

It has caused quite a bit of volatility in the iron ore price. When the disaster first occurred, prices jumped from around US$74 a tonne all the way up to just shy of US$90, and since then have come off a bit, hitting down around US$82. But with Rio Tinto’s announcement earlier this week, they actually pushed up again to around US$84.

The key thing that a lot of people don’t appreciate is that although some of these other miners tend to add tonnage to the market, really what they can add though is what we’ll call average 62% material.

Unfortunately, the ore coming out of Australia is increasing quite a bit in two major contaminants: phosphorus and alumina.

The problem with those contaminants is it makes steel brittle.

If you’re just making, say, rebar for construction, it doesn’t matter if the steel is a bit brittle because it is all encased, but if you’re making a skyscraper, or if you’re going to build a rim for a car, that steel needs to be flexible so that if the car hits a pothole, you don’t want that rim to crack. Or in the case of a building, the building needs to move a little bit with the wind and not have the steel crack.

And the best way to reduce the phosphorus and the alumina, of course, is to blend it with higher quality material like what we have here in Canada, what Vale supplies and what we are looking to supply with Black Iron.

The other major aspect to the story is that 10% of the world’s pellet production is also now taken offline with these mines that are being shut down by Vale.

Where it might be easy to increase, say, fines or lump from other sources around the world, to build a pellet plant takes quite a bit of planning, permitting, plus construction.

So it’s going to be at least a few years before the pellet feed and pellets are replaced from that tonnage that has been lost.

TNM: North Americans are often obsessed with gold and maybe aren’t as familiar with pellet plants. Could you explain the value of a pellet plant and what it produces, how difficult it is to build a pellet plant and what is the current situation with the pellet plants in Brazil? I guess the analogy would be a miner having a refinery for its base metals versus a mine just producing a concentrate to sell. Would that be correct?

MS: Sure, yes. I mean, there are three types of iron ore, generally speaking.

The first is called fines, the second is lump and the third is pellets, and really in that order is the price that steel mills pay for them.

It’s largely because with pellets, you have a much higher productivity of steel per size of furnace that you are using.

The way pellets are made is you typically take an iron ore fine or a concentrate, which is like a sand, and you grind it even finer into a very, very fine, almost like talcum powder consistency, and then you roll it into balls about the size of a marble with a binding agent and then you cook them in a furnace in order to make them hard.

Then when you charge a blast furnace with pellets, because the pellets are all perfectly uniform in size, being these marbles, you get very even airflow through that furnace, which allows the pellets to melt at a very even rate and that’s what gives you that higher productivity in the furnace.

Even more importantly, given that the world is becoming more and more sensitive towards greenhouse gas emissions, it also means that you burn less coal per tonne of steel made. So it’s much more environmentally friendly as compared to lump or another product which is called sinter.

Sinter is basically you take those fines and instead of making them into perfect-sized balls, you just fuse them together into chunks and feed those chunks into the furnace.

TNM: Broadly speaking, Brazil is known as producing very high-quality iron, Australia low-quality irons and you have different benchmark prices. What does this Vale disaster mean to overall iron ore quality and the different premia with the different benchmarks?

MS: Typically, material coming out of Australia ranges between about 58% from guys like Fortescue up to around 62%, 63% from the BHPs and the Rio Tintos, whereas Vale produces more of a 65% to a 66% iron. So much, much higher iron content, which again reduces the amount of coal required to make a tonne of steel.

This high-quality product does sell for a premium. So when people talk about iron ore prices that they are selling for US$84 a tonne, what they are referring to is iron with a 62% iron content, whereas the 65% material that Vale makes is typically selling for a substantially higher amount, closer to about US$100 a tonne. Today you get around US$4 to US$5 per 1% iron above 62%.

TNM: A Brazil-specific question: They have the wet beneficiation in the south with slightly lower quality ore compared to the northern system in Vale and then, of course, the wet beneficiation yields far more water that you need to put behind a tailings dam. What is going on with the wet beneficiation? What does that mean to Vale?

MS: When you mine iron ore, you really have two types of ore. You have what is called direct-shipping ore (DSO), which is typically 55% all the way up to 65%, sometimes as high as 70%, but quite rare — so more of that 55% to 65% range with the bulk of it being 58% to 62%.

Then you have ores like what we have here in Canada that need to be concentrated. What that means is you take an ore that has a head grade somewhere in, say, the mid-20s to low 40s and you grind it and you either put it through spirals or you put it over large magnets to increase its iron content typically to about 62% to 65%.

So it does cost more money to make that product with a wet processing circuit as you mentioned. However, the benefits are that you have much greater control over your silica, alumina, phosphorus and sulphur, so you can end up with a much, much cleaner product at the end of the day.

That product becomes very valuable because you typically do need to blend some of those direct-shipping ores which may have one of those other elements like the phosphorous, the alumina and silica too high to make a quality steel.

TNM: What do you make of this issue with the upstream tailings dams in Brazil that are obviously going to be phased out? How much of this is a Brazil problem or a Vale problem, and how much of it is an industry problem?

MS: It’s definitely an industry-wide problem.

I think it very much varies by country as to whether upstream tailings dams were even allowed to be constructed. There are several countries in the world where this practice is just not allowed because it is much higher risk.

So in Brazil it’s a major issue and that’s why those 11 mines were shut down until new tailings dams are constructed in a much safer manner.

It really does vary by country, but it’s going to be very important for any mining operation, not just iron ore, that has an upstream tailings dam, to take a very hard look at their design and make sure that it is safe, and probably look at rectifying that situation and creating a safer designed dam.

TNM: Could you explain to people who aren’t familiar with tailings dams, what an upstream dam is compared to other ones? Why it is cheaper to build, etc.

MS: I don’t have a huge depth of knowledge technically on these, but what I can tell you is with an upstream tailings dam, usually what happens is that you build a dam towards the front of where you are adding it towards, and you’re typically using the tailings themselves in order to construct the dam as opposed to a downstream tailings dam in which you are advancing the dam away from your actual tailings beach-head. So you’re making it a much more stable barrier, if you will, to keep those tailings in place.

TNM: Would you broadly say they are not good for wet countries? Is it okay to use upstream ones in Namibia or somewhere like that?

MS: I couldn’t comment on that. I just don’t have enough depth there.

TNM: I’m not sure if this affects the whole world, but some shipping costs have dropped dramatically because there won’t be this iron ore coming out of Vale in Brazil going to China. Do you know much about the shipping rates?

MS: Yes, you’re right. What I’ve been reading is that ocean-going Capesize, which are the very large vessels, typically 180,000 to maybe 250,000 tonnes, are actually at a low right now. And those prices have come off quite a bit in the last few months.

That does actually make it a lot more cost-effective for mines that are located farther away from China to ship their product, because with iron ore, another thing that is important for people to realize is that it is always priced delivered to China. It’s called CFR China, regardless of where the mine ships its product.

TNM: I would guess, broadly speaking, because of this Brazil high-quality material coming off the market, that makes the very highest quality deposits like what we have in Canada and you have in Ukraine, other places, extra valuable because you can hold them aside and blend their ore with lower grade Australian ores. Is that correct?

MS: You’re absolutely correct. It’s the quality of the ore and also the higher iron content that makes those mines so much more valuable now.

TNM: Which countries or regions have this very highest quality iron ore. I know your ore in Ukraine is in the top 4% of the world. What exact spots have this really nice stuff?

MS: Some of the purest ores in the world do come out of Canada, here. We tend to make iron with 65% content with a nice level of silica and pretty low in terms of the sulphur, the alumina and the phosphorus again. Chile also produces some very good ore. Out of Europe, you have LKAB out of Sweden that makes a very, very premium product. And in Ukraine, a lot of the companies make a very high iron content but they don’t grind the product fine enough to get the silica levels as low as what would be ideal.

Whereas with our case at Black Iron, we are planning on making more of a pellet-feed product as opposed to something that would be more suitable to make sinter. Because that’s really where the world is shifting towards, it’s more of this pellet lower-emission type product.

Therefore, it does allow us to drop the silica quite a bit while still maintaining that very, very high iron content.

TNM: Could you give your idea of what the global iron ore market is going to look like over the next year or two with the reduction in Vale production? Some of Vale’s suspended output will come back, and some of it will never come back. And then you have the worsening quality of ore in Australia. Can they turn that around metallurgically somehow, or is that just a trend that will continue?

MS: I think we’re going to see quite a bit of volatility on the 62% benchmark price. It will probably range anywhere from the mid-US$70s all the way up to the high US$80s. And that’s really an area that none of the analysts, none of the reports that I am reading have a great handle on. That is a range that most people would agree with, that I just stated.

Where people do agree though is that the pellet price and pellet feed price will continue to remain elevated. Again, because this isn’t easy — capacity is displaced.

When you start talking about things like alumina and silica and phosphorus levels, what we’re also seeing is that the premium/penalties being charged on those different elements are actually increasing with time.

What does this mean for the sale price for some of the ores in Australia? To answer your question, they cannot easily change levels of phosphorous or alumina. In order to do that, they would have to build a wet concentrator or they would have to build some sort of process to extract those minerals out cost-effectively, which just doesn’t exist today.

So they’re kind of stuck with those high elements, which means they are going to receive lower-realized prices for their product as compared to ores coming out of, say, Ukraine, Canada, Brazil, which will actually see a price increase because of their cleaner ore and higher iron content ore.

You will also see pellet prices and pellet feed prices remain quite elevated, too, given that, again, you have about 10% of the world’s supply taken off with this tragic Vale disaster.

TNM: Normally, we would just be talking about Chinese demand for iron ore. Where do you see Chinese iron ore demand in the next couple of years?

MS: A lot of what I am reading right now is saying that Chinese demand is going to be fairly flat over the next period of time.

But you are seeing the Chinese government institute a lot of new environmental emissions regulations, which are causing some of the steel mills to consolidate and shut down such that only the larger, more modern, efficient mills are remaining.

What that is doing is it is forcing a lot of the steel mills to be able to stay in business and not be constrained by the government to shift, again, to this higher-content feedstock because it does reduce the amount of coal they burn to make that tonne of steel. So there is very much a shift in the market.

Historically, we would have about US$2 to US$3 per 1% premium or penalty on the iron content relative to 62%. As I mentioned, today we are seeing more like US$4 to US$5 and that did actually hit a high of almost US$9 within the past year.