Cliffs Natural Resources (NYSE:CLF) has finally been forced to acknowledge the extent of its problems at the Ring of Fire chromite project in Ontario, Canada. The company announced that it is temporarily stopping the environmental assessment for the $3.3 billion project due to unresolved land rights and unfinished agreements with the provincial government. Without substantive progress on these fronts, it is reluctant to move forward with the project, especially at a time when its resources are strained due to a difficult business environment. Cliffs sought to emphasize that it remains excited about the project and will continue working with the government and other stakeholders it is negotiating with. 
The company’s chromite properties are located approximately 155 miles north of the town of Nakina and about 50 miles east of the First Nations community of Webequie. It has a controlling position in three chromite deposits that occur in close proximity to each other — a 100% interest in each of the Black Label and Black Thor chromite deposits and a 70% interest in the Big Daddy chromite deposit. Cliffs has completed a pre-feasibility study on the Black Thor deposit, the largest of the three deposits, and had been working on a feasibility study, which was to be completed by mid-2013. 
Status Of Cliffs’ Progress
In the face of hurdles, progress towards construction has been very slow. As recently as March, Cliffs had sounded upbeat about overcoming many of these challenges. It had claimed that the feasibility study on Black Thor was on schedule and expected to be completed later this year. The company had also said that it was keen to bring in more partners into the project to share capital cost and risk. Any meaningful discussions were only expected to begin once the feasibility of the project has been established. Another area where Cliffs claimed to be making progress is in its talks with the First Nations communities. First Nations are autonomous aboriginal communities who live in the adjoining areas and are concerned about jobs, business opportunities and improved infrastructure. (Ring of Fire project has staggering hurdles to overcome, but progress on horizon, Financial Post)
Why Put The Project On Hold Now?
Due to the diverse nature of the First Nations communities and wide-ranging concerns, progress has been slow and negotiations complicated. Another area where progress has been tardy is the signing of a definitive agreement between the company and the Ontario government. These agreements pertain to the lack of infrastructure in the Ring of Fire area and are critical to the project’s economic viability. In the absence of an agreement, production cannot begin. Other reasons for the suspension are a delay in approval of the Terms of Reference for the provincial environmental assessment process and unresolved land surface rights issues following a February 2013 Mining and Land Commissioner hearing. The ministers in the government have refused to commit to a time period to conclude negotiations.
Potential Of The Chromite Mines
The Ring of Fire region is thought to hold up to $50 billion worth of minerals and is going to be North America’s first major source of chromite. Black Thor alone is expected to produce 600,000 tonnes of ferrochrome once production begins. Cliffs has a capital expenditure budget of close to $3.3 billion for this project. Ferrochrome is used mostly in the production of stainless steel and there are very few mines in the world with large deposits of chromite from which it is made.
Why Are Chromite Projects Important For Cliffs?
Cliffs Natural is heavily dependent on the iron ore business. Unlike companies like Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP) and Vale (NYSE:VALE), it is not a well-diversified mining company. Also, since it doesn’t enjoy economies of scale like these companies do, its cost of production is higher. Tumbling iron prices thus affect it much more than for larger, more diversified players. Cliffs suffered a setback in 2012 due to plummeting iron ore prices, which dented its profits and cash flow and resulted in heavy impairments worth $2 billion. Iron ore prices in 2013 are faring no better currently and are expected to plunge further in the next 2-3 years. It even had to slash the dividend payout substantially. (Australia predicts fall in iron ore price, Financial Times)
In addition, the company’s North American iron ore and coal divisions’ revenues are highly dependent on a few customers. ArcelorMittal (NYSE:MT), Algoma (OTC:AGMJF) and Severstal (OTC:SVJTL) together accounted for 62% of Cliffs’ U.S. iron ore revenues in 2012. A loss of sales to any of these existing customers could have a substantial adverse impact on the company’s revenues and profitability. All of these factors point to an urgent need for diversification, which the chromite business can provide. Production was earlier supposed to begin in 2016, but given the repeated delays and the suspension now, this seems unlikely.
Our price estimate for Cliffs Natural Resources is $30.
- Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues, Cliffs News Release
- Cliffs Natural Resources 2012 10-K, SEC
Disclosure: No positions