Cliffs Natural Resources may exit Eastern Canada and close its Bloom Lake iron ore mine in Quebec, the company said Wednesday after failing to find a suitable partner amid low ore prices to share the cost of a $1.2-billion expansion required to make the operation viable.
"Despite the continued interest of the prospective equity partners in Bloom Lake and in its high quality ore, the potential investment is not achievable within a time frame acceptable to Cliffs," said chairman and CEO Lourenco Goncalves, who took the helm in August.
The mine is about 975 kilometres northeast of Quebec City and 30 kilometres southwest of Labrador City, N.L., in an area known for iron ore deposits.
With the Bloom Lake expansion out of the picture, Goncalves said the Cleveland-based company is shifting its focus to exiting the region to minimize cash flows and liabilities.
Shares in Cliffs (NYSE:CLF) closed down $2.04 or just under 20 per cent at $8.17 Wednesday in New York. The stock has had a 52-week range of $7 to $28.23 per share.
Closing the mine would cost an estimated US$650 million to US$700 million over five years.
According to the company's website, the mine had 539 fly-in workers and 40 local staff as of the end of 2013.
In asking the provincial government to intervene, the union representing workers said the closure marks the "death of the Northern Plan" for Fermont, where the mine is located.
"If this miner is not able to invest....we ask that it sell the installation to anyone to complete the second phase," Steelworkers representative Dominic Lemieux told a news conference after learning the news through media reports.
Cliffs acquired majority ownership of Bloom Lake — a new mine that began production in 2010 — as part of its takeover of Consolidated Thompson Iron Mines Ltd. in a $4.9-billion deal that closed in 2011.
The company announced two years ago, in November 2012, that it would delay Phase 2 and idle some of its U.S. iron ore operations in Minnesota and Michigan.
Two months later, in January 2013, it said the value of its Consolidated Thompson acquisition would be written down by about US$1 billion because of reduced anticipated long-term volumes and higher projected costs but continued to say the Phase 2 construction would be complete by early 2014.
Then, in third-quarter results issued Oct. 27, Cliffs said it had written down its Bloom Lake long-lived assets by a further US$4.5 billion and that it wouldn't provide 2015 guidance for sales tonnage from the mine because the company hadn't made a definitive decision on its future.
Bloom Lake has an annual capacity to produce seven million tonnes of ore. A phase 2 expansion would have raised that to 14 million tonnes, with plans for a further upgrade to push capacity to 21 million tonnes.
The company targeted adding three more equity partners, with each buying a 10 per cent stake by the end of 2014. Among them was Nucor, according to a Wall Street Journal report.
Cliffs also disclosed Wednesday that its Quebec subsidiary and Bloom Lake partners recently lost an arbitration claim against a former customer, which had terminated a sales agreement in August 2011. The arbitrator awarded the former customer more than $71 million in compensation and other fees.
Low iron ore prices have disrupted operations in the Labrador Trough region of Quebec.
Toronto-based Labrador Iron Mines (TSX:LIM) has suspended all operations at its mines for the year. The company said Tuesday that it needs a financial restructuring and new creditor agreements while it waits out a market downturn that has cut iron ore prices.
LIM is seeking to negotiate support from an existing creditor and offtake partner, RBRG Gerald Metals, but expects that could require a filing under the Companies' Creditors Arrangement Act and more favourable commercial terms on supply and service contracts.
Cliffs previously idled its other two operations in Eastern Canada — Wabush Mine in Newfoundland and Labrador earlier this year affecting 500 employees — and Pointe Noire near Sept-Iles in 2013, affecting 165 workers.
Analysts said the closure costs are higher than they had forecast.
Brian Yu of Citi said it's unclear if Cliffs can "ring fence Canada" as it previously stated — suggesting it hoped to isolate the problem without affecting other global operations.
"While today's announcement is specific to Bloom Lake, the company's Australia mines are also at risk of closure," Yu wrote in a report.
He reiterated his sell rating based on a forecast for iron ore prices to average US$65 per tonne in 2015-2016.
Yu doesn't foresee Cliffs breaching its lending covenants over the next two years, assuming the company ends its dividend.
Evan Mann of Gimme Credit said closing the money-losing Bloom Lake mine would be positive by eliminating a drag on EBITDA (pre-tax operating earnings) and cash flow from operations.
"However, the $650-700 million cost of closing this mine is troublesome for a company that produced a $237-million free cash flow shortfall after dividends for the first nine months of 2014," he wrote.
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