Break Even???, page-30

Grange Resources (GRR) sold magnetite pellets at $US78.07 per tonne in Sept quarter. GBG price was $US59.93 per tonne. Why is this happening?

Interesting article in Grange Resources Annual Report 2016 who produce magnetite pellets in NW Tasmania.

Explains why magnetite should have a premium.  There are some graphics which I have not been able to copy but you can see them here: http://www.grangeresources.com.au/c...em151/grange_resources_annual_report_2015.pdf.

Magnetite is a naturally occurring mineral commonly refined into an iron ore concentrate and used for steel production. Iron ore makes up about five per cent of the Earth’s crust and most commonly occurs in the form of haematite or magnetite. Most of the magnetite mined now is used as an ore of iron. Iron liberated from magnetite ore is usually used to make concentrate for pellet feed or pellets which are used to make steel.

The Australian iron ore industry has traditionally been based on the mining, production and export of haematite ores, also referred to as ‘Direct Shipping Ore’ (DSO). Approximately 96 per cent of Australian iron ore production comes from DSO. While magnetite is an emerging industry in Australia, globally it accounts for approximately 50 per cent of iron ore production (emphasis added).

Smelting magnetite to iron involves agglomeration or ‘clumping together’ of the magnetite concentrate, and thermal treatment to produce iron ore pellets. The pellets can be used directly in a blast furnace or at direct reduction iron-making plants.

Magnetite concentrate has internal thermal energy meaning less energy is required, compared to haematite, in the pelletising process which in turn results in less carbon dioxide emissions. The blast furnace chemically reduces iron oxide into liquid iron called ‘hot metal’. The iron ore and reducing agents (coke, coal and limestone) are combined. Pre-heated air is blown at the bottom of the combination for up to eight hours. The final product is a liquid which is drained, and eventually refined to produce steel.

Mining magnetite ore is a high volume business. It is capital intensive and requires significant downstream processing infrastructure including a beneficiation plant, a pellet plant and port facilities. As can be seen from the following graphic ore products such as fines and lump (can't copy graphic - but you can see it on page 6  of annual report). This premium is derived on two fronts, through additional iron content, and a quality premium.

The growth in Chinese demand and its understanding of the change in the value accrued to both magnetite concentrate and pellets, and the methodology used for determining that value.
As magnetite concentrate is a refined product, it usually has  quality and environmental outcomes for the steel maker.

Until April 2010, iron ore prices were traditionally decided in closed-door negotiations between the small handful of “key” miners and steel makers which dominated both spot and contract markets. Traditionally, the first agreement on price reached between these two groups set a benchmark price that was followed by the rest of the industry for a 12 month period.

This benchmark system broke down in 2010 with pricing moving to short term index-based mechanisms. Given that most other commodities already have a mature market-based pricing system, it was natural for iron ore to follow suit. This has seen magnetite product pricing change so that it is now based on the transparent market based index prices, with premiums being paid for increased iron ore content and pellet manufacture.
  
Grange Resources Limited (Grange Resources) owns and operates Australia’s largest integrated iron ore mining and pellet production business located in the northwest region of Tasmania. The Savage River magnetite iron ore mine, 100km southwest of the city of Burnie, is a long life mining asset set
to continue operation to beyond 2030. At Port Latta, 70kms northwest of Burnie, is Grange Resources’ wholly owned pellet plant and port facility producing more than 2 million tonnes of premium quality iron ore pellets annually with plans to increase annual production. Grange holds long term supply contracts for 1 million tonnes of its annual production and offers the balance of its production to market via a spot sales tendering and contracting process. All products are offered FOB and are shipped to major steel producers in the Asia Pacific region.

As well as this profitable magnetite operation, Grange Resources has the majority interest in Southdown near Albany in Western Australia. Grange is actively seeking an equity partner to take a strategic share of the Company’s interest in the project. Grange Resources is Australia’s most experienced magnetite producer. Grange is a proven and reliable commercial producer combining both mining and pellet production expertise.
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4 GRANGE