West African iron boom turns to bust: a slump in the price of iron ore has forced several junior miners to the wall.

Author:Morgan, M.J.
Position:Commodities
 
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Twelve months ago, West Africa was in the middle of an iron ore boom. Prices had remained above $100 per tonne for the better part of five years, sparking a surge of interest in deposits in once marginal markets, such as Sierra Leone, Liberia and Guinea.

The 'Big Three' in iron ore--BHP Billiton, Vale and Rio Tinto--led a wave of interest, with mega-projects like Simandou in Guinea promising to turn previously unviable regions into a new frontier for the industry.

Simandou has been at the centre of a major controversy since the former government stripped Rio Tinto of its licence for several blocks in 2008, but in May last year Rio, along with the World Bank and Chaleo, a Chinese industrial company, announced a $20bn deal to develop the southern part of the asset with a 650km rail line and a new deepwater port.

Turning the region into an iron and steel export hub would require billions in capital investment into railways and ports, but with the price high and Chinese demand buoyant, it seemed a safe enough prospect.

By the middle of March 2015, iron ore had fallen to a seven-year low of less than $58 per tonne. Chinese growth is forecast to be its slowest for two decades, and the junior miners that joined the rush are now pushing against market headwinds.

The World Bank, which forecasts a $75 per tonne iron ore price this year, has said that it anticipates the market to be in surplus for the next two years. Goldman Sachs predicts that surplus is likely to grow from 43m tonnes in 2013 to 260m tonnes in 2018, while Morgan Stanley forecasts that the glut may grow to 437m tonnes in three years.

"[Iron ore] is a bulk commodity so infrastructure is absolutely key to successfully exporting product--at today's prices, most projects are uneconomic unless they have expensive rail and port infrastructure and each of these countries is severely infrastructure constrained," says Andrew Chubb, a director at Hannam & Partners, a corporate advisory firm that specialises in mining in Africa.

Larger producers are able to weather slimmer margins, with production costs typically at around $20 per tonne, but juniors are in trouble.

"Most frontier mining projects require significant investment in infrastructure assets, junior mining companies need to find deep-pocketed investors willing to fund them," Chubb says.

"At one point, that was being provided by the Chinese but that source of funds seems to have dried up leaving the only alternative of selling to or...

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