Glance through the recent first-quarter upgrades from copper miners across the globe, and it quickly becomes apparent that the struggle to maintain ore grades is now a structural problem facing the industry. However, it should be noted that this issue - while not yet so acute - is also relevant to the iron ore industry. This was brought home last month when Luiz Mello, technology director of Vale SA, confirmed that the Brazilian mining giant was considering a range of strategies designed to attenuate the problem of declining grades. Where Vale goes, others will surely follow.
Any old iron
Although Vale maintains that its ore bodies still have superior grades to other large-scale producers such as Rio Tinto, the fact that they're in decline has prompted some resource analysts to speculate that long-term price projections for iron ore are well short of the mark. The general consensus holds that bulk prices - based on last month's average of $147 (£90.85) a tonne - will eventually fall by around 39 per cent as more production comes on-stream.
However, if average grades in Brazil's southern iron ore system - as some anticipate - fall by a third over the next few years, it would invariably feed through into higher processing costs - and consequent Free On Board (FOB) prices - for regional producers such as Vale SA and Anglo American.
China moves on prices
This scenario wouldn't be welcomed by the world's big steel producing countries, particularly, of course, China. Coincidently, the People's Republic has just taken a long overdue step in its bid to stabilise iron ore prices, through the introduction of a domestic iron ore spot trading platform. Although China accounts for around 60 per cent of the global trade in iron ore, it has a limited influence over pricing, which creates problems for the country's domestic steel mills, and Chinese industry as a whole.
Nevertheless, even if the new platform helps to counteract any perceived price manipulation in the market, if ore grades are in decline then spot prices will inexorably head upwards. So it may well be that China - and other big end-users such as Japan and Korea - will increasingly focus on new deposits across the globe, not only to access higher grade ore bodies, but also strategically to diversify supply routes.
Out of Africa
One potential option has emerged on Africa's west coast, and has already attracted the attention of industry players such as Xstrata, Sundance Resources and Sinosteel. Although the region currently produces less than 1 per cent of the world's iron ore, this could rise 10-fold in a relatively short space of time, according to a report from the US Geological Survey. The main iron ore belt is located just above Cameroon's southern border with Equatorial Guinea; the mineralised zone extends roughly 500km inland before heading some 280km southwards into neighbouring Congo-Brazzaville. The width of the zone ranges from 150km-270km.
It's obviously a huge land mass to cover and only a limited amount of exploratory work has been carried out thus far. Nevertheless, early indications provide genuine cause for optimism. As you might expect, early exploratory work has produced mixed results, but licence holders in the region have turned in some highly encouraging resource estimates. Australia's Sundance Resources, for example, uncovered a 522m tonne inferred deposit with a grade of 60.7 per cent as part of its Mbalam iron ore project on the Cameroon/Congo border.
The commencement of construction work at Mbalam moved a step closer in April after Sundance signed off key terms with the Cameroon government, which should result in China's Hanlong Mining acquiring Sundance for $1.64bn.
It's clear that China's footprint in the region is expanding, as it seeks to wean itself off its traditional supply channels, although this will be easier said than done. In 2007, Chinese project engineering group CMEC secured rights to a 556m tonne inferred resource of 64.2 per cent grade ore at the Belinga project in Gabon. However, following protracted wrangling over contractual and regional environmental issues, the Belinga concession was taken away from CMEC, and it has since been reported that BHP Billiton has cut a deal with the Gabonese government, which will result in the Anglo-Australian miner taking control of the concession. If it's confirmed, the deal could add another 30m tonnes to BHP's annual iron ore output.
An Aim play worth watching
Perhaps the largest permit holder in Cameroon is West African Minerals (WAFM) – a £110m Aim-traded miner headed by mining financier Stephen Dattels and co-chaired by Brad Mills, ex-chief executive of Lonmin and former president of BHP's base metals division. Mr Dattels has a strong record of monetising mining assets; the chief example being the $2.5bn sale of UraMin to Areva in July 2007.
WAFM has identified 30 prospective zones through an aeromagnetic survey of its exploration licences in Cameroon, Sierra Leone and the Central African Republic; a number of which are in close proximity to advanced iron ore projects that share similar geology. Brad Mills believes that West Africa's potential is immense: "To put the iron belt that stretches across Cameroon and the Congo Republic into perspective, we are talking about a formation that could rival, and one day replace, the likes of the Pilbara in Australia."
Over the past two years, major deals worth in excess of $10.9bn have been conducted in the region, so presumably there would be no shortage of ready buyers should WAFM prove-up a resource base, particularly if it identifies strong grades from its Binga prospect, which is just 50km-75km from the Cameroon coast, thereby greatly reducing potential FOB costs; a point emphasised by Brad Mills: "We are exclusively looking for the highest grade DSO (Direct Shipping Ore) deposits possible as this is what blast furnaces are ideally looking for – 60-65 per cent grade with low impurities. The early indications are looking very encouraging. Generally, the capital requirement for developing a DSO resource is low if it is near to the coast. Since there is virtually no beneficiation of the ore, the only requirement is mining, crushing, screening and transportation to a low capital expenditure offshore ship loading facility. So with $200m-$300m in capital expenditure it is possible we may be able to see cash-flows within a two-year period from our Binga licence area."
The earlier point about iron ore pricing is obviously set against a backdrop of faltering demand from China, and if you're taking a long-view of the industry, it's worth remembering that the percentage of scrap and recycled metals used within the People's Republic will invariably rise.
But while the secondary metals market will gradually eat into demand for ores, the issue of grades will remain key to steel making. Even if Chinese GDP was to average only 5-6 per cent over the rest of the decade, the country, indeed Asia as a whole, will still clamour for high-grade hematite to drive the steel industry.
China's administration has also set a goal to eventually own at least 50 per cent of the sources of its iron ore imports. Therefore, the likes of WAFM will be firmly in the cross hairs of Beijing if they prove-up their West African assets. Miners in Africa's emerging iron ore belt could also enjoy a relative cost advantage, particularly given the strength of Australia's currency and its burgeoning labour costs.
And, contrary to popular misconception, the world's stock of iron ore is far from inexhaustible, particularly high-grade hematite. Some reputable academic studies have concluded that if consumption continues to increase at the current rate of 2 per cent a year, then commercial deposits could conceivably disappear by the end of the century.
