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The iron ore market's next producer believes China's desire for higher-grade product will continue, and Fortescue Metals Group's plan to improve its iron grade proves the market for lower quality ore is "getting smashed". Former Riversdale Mining boss Michael O'Keeffe said China's increasing desire for quality commodities means his Canadian iron ore play, Champion Iron, is set to enter the market at the ideal time given its product has iron grades above the 62 per cent industry benchmark.
Champion is reviving Quebec's Bloom Lake mine, 950 km northeast of Montreal, after acquiring it from Cliffs for less than $11 million in 2016, and Mr O'Keeffe said the mine should be exporting concentrate with 66.2 per cent iron content within four months.
"When we actually bought the asset the iron ore price had dipped down to about $US39 per tonne, and we believed that was never sustainable and we also believed that as we were going forward you were going to see this premium for the higher grade material," he said this week.
"I think you are going to see the continuation of the spread in terms of high grade and low grade, I am hoping for an average price of $US60 to $US65 per tonne in 2018 for a 62 (per cent iron) type material and IÂ think that is a good sustainable number."
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Fortescue sells ores with iron grades between 56 per cent and 59 per cent, but revealed a new strategy last week for a majority of its product to have iron grades above 60 per cent in the future.
That shift came after wider than normal discounts were applied to Fortescue's product this year.
"You only have to look at the litmus test which is called FMG, and he (chairman Andrew Forrest) is talking all this stuff about getting 60 (per cent iron) material and above, I don't know where in the hell he is going to find it," said Mr O'Keeffe.
Fortescue has identified the Eliwana deposit in Western Australia as the likely replacement for its Firetail mine, and the push to improve iron grades will be considered as part of the development process at Eliwana. Mr O'Keeffe said Champion should have all-in costs at Bloom Lake of about $US50 per tonne once it reaches its goal of producing 7.5 million tonnes per year. Surging shares
While Champion is one of the lowest-profile iron ore companies on the ASX, its shares are also among the best performed over the past couple of years.
Champion shares have risen seven-fold since the Bloom Lake acquisition was completed in April 2016. When measured over the past 30 months, the stock has risen 20-fold and Mr O'Keeffe believes there is still upside if iron ore prices remain near Wednesday's price of $US72.68 per tonne.
"With prices where they are today we will have a very, very good year in 2018," he said. "If all goes well next year we may have a little sweetener for shareholders but that is all dependant on how we perform and what happens with the iron ore price."
Mr O'Keeffe says he has no interest in the Australian iron ore assets that Cliffs is trying to sell, and while Rio Tinto's Canadian iron ore assets are attractive, he did not expect there would be an opportunity to buy them cheaply any time soon. Swiss giant Glencore is heavily involved with Champion, both as a buyer of its iron ore and as the holder of a $US25 million convertible note. Riversdale to Rio
If converted, Glencore could emerge as the company's biggest shareholder, and the Swiss miner's involvement is little surprise given Mr O'Keeffe's served as the company's Australian managing director prior to 2004.
But Mr O'Keeffe is best known as the man who sold Riversdale's Mozambique coal assets to Rio Tinto in 2011 for $US3.7 billion. Within two years Rio had impaired the Riversdale assets by $US2.86 billion and it eventually sold them for $50 million after having to abandon plans to barge the coal down the Zambezi river.
The saga was put back in the spotlight in October when US market regulators lobbed fraud charges against Rio and its former executives over the timing of the Riversdale impairments.
The US Securities and Exchange Commission has interviewed scores of people involved in the Riversdale acquisition, but Mr O'Keeffe said the SEC's investigations had nothing to to do with him.
"That is their (Rio's)Â business, IÂ am not on their board...it has got absolutely nothing to do with me," he said. Billions of tonnes
While the Mozambique government's refusal to allow Rio to barge the coal to market was the major problem with the Riversdale acquisition, the assets were also found to contain less premium hard coking coal than Rio had initially expected.
Some believe Rio's choice of coal treatment technology in Mozambique was responsible for the coal resource downgrades that contributed to the 2013 impairments, and Mr O'Keeffe said everyone knew what yields were possible.
"The yields were always known as low, but what changed that was the strip ratios, there is billions of tonnes of coal there," he said.
Brazilian miner Vale is exporting coal from Mozambique and is developing a major railway to Nacala port in partnership with Mitsui, and Mr O'Keeffe said such projects would ensure that Mozambique achieves its potential.
"You will see that Mozambique will be a very, very, very big coal province and distributor of coal going forward," he said.
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