LIM halts production due to low prices

After another disappointing fiscal year, Labrador Iron Mines (TSX: LIM; US-OTC: LBRMF) says it will not restart mining at its operations in the Labrador Trough  this coming year partly due to weak iron-ore prices, and will instead refocus on reducing costs. 

LIM reported a net loss of $105.2 million, or 83¢ per share, for the fiscal year ended March 31, 2014. This compares to a net loss of $129.7 million, or $1.56 per share, the year before. The Toronto-based firm will likely post another loss next year given the declining iron prices.

The spot price for iron ore fell 30% to below US$90 per tonne in mid-June — the lowest level since 2012 — even as Australian exports to China have been increasing and contributing to a growing global iron ore surplus. Last year, iron-ore prices averaged US$131 per tonne.

“LIM is not planning for any mining or processing activity in 2014, which is planned instead to be a development year for the company,” Rod Cooper, LIM’s president, said in a statement.

For the balance of the year, LIM intends to develop its flagship Houston iron ore project near Schefferville, Que. It estimates it would require $20 million to bring Houston online, with production targeted to begin in April 2015.

While LIM believes it can raise that amount, it warns there are “no assurances” that it will be successful in doing so.

Desjardins analyst Jackie Przybylowski estimates LIM would need another $30 million in working capital to start operations, bringing the total to $50 million.  “Given the high cost of development and the low probability of Labrador Iron Mines raising the capital, we are not expecting Houston to start-up in calendar year 2015, as planned by management,” she said in a note.

To lower its operating costs, LIM has renegotiated terms with its major contractors and suppliers to reduce mining equipment rates and costs for fuel procurement, hydroelectric power and exploration, among other expenditures. It has also reduced its contract labour, and is negotiating the terms of an offtake agreement with RBRG Trading.

The agreement calls for the delivery of 3.5 million tonnes of ore in 2014, in exchange for a US$35-million advance. So far, LIM has delivered 1.6 million tonnes and is hoping to deliver the rest in 2015. LIM’s failure to revise the contract terms could be “catastrophic,” Przybylowski warns. 

LIM also had a tough operating year in fiscal 2014. CEO John Kearney noted that while LIM achieved its sales target of 1.7 million wet tonnes of iron ore, it was “at the expense” of product quality, as ore grade and consistency suffered.

In fiscal 2014 LIM extracted 1.6 million tonnes from the James mine, plus small amounts from the Redmond mine and the Ferriman stockpiles for a total of 1.9 million dry tonnes grading 56.2% iron. This compares to 1.8 million dry tonnes grading 61.3% iron a year ago.

The company notes that mining at James was from deep in the pit and it yielded lower grades and greater fines, while material from Redmond contained high clay content, which resulted in negative cash generation.

For fiscal 2014, LIM posted a negative cash flow from operations of $37.1 million and an $8.7-million working capital deficit.

LIM shares recently closed at 8¢. Przybylowski has cut her target to 2¢ from 10¢, noting her target is based on an estimated “salvage value” of LIM’s assets, “given the high level of uncertainty around whether the company will ever restart production.”

She has a “sell” on the stock.