ANALYSIS - Steel firms come knocking at Canada's iron ore door

By Aftab Ahmed and Koustav Samanta

BANGALORE | Tue Aug 31, 2010 9:06pm IST

BANGALORE (Reuters) - Canadian iron ore explorers hope to win lucrative contracts or joint ventures from steel majors seeking to secure supplies and escape the clutches of the three mining powerhouses that control two-thirds of the $88 billion global seaborne iron ore trade.

Eyeing increased demand as the global economy tiptoes out of recession, steelmills are ramping up the amount of iron ore they hold and are scouting mineral rich-countries from Canada and Australia to India and Africa.

"As Canada has a long history of iron production with a significant endowment of large deposits, it naturally represents one of the countries of interest," said Haywood Securities analyst Geordie Mark.

Brazil's Vale(VALE5.SA), Anglo-Australian Rio Tinto(RIO.L) (RIO.L) and BHP Billiton(BHP.AX) (BLT.L) have this year ditched a longstanding annual price-fixing system in favour of agreeing quarterly prices -- adding to steel firms' vulnerability on their biggest single cost.

Analysts said that to remain competitive in iron ore, steel companies need to buy into development projects.

"In our view, those that want an 'in' to the lucrative iron ore business will need to buy projects as the 'Big Three' are not sellers of existing productive capacity," said Raymond James analyst Tom Meyer.

With Canada ranked eighth among leading iron ore producing countries, the queue is already forming at its door.

Among those attracting interest are New Millennium Capital Corp (NML.V), in which India's Tata Steel(TISC.BO) has increased its stake to 27 percent, and the Canadian firm's CEO sees Tata investing more.

Analysts reckon Tata, the world's 7th-largest steel producer, will invest C$300 million ($283.3 million) in New Millennium's direct shipping ore (DSO) project by a mid-September deadline, completing the 80 percent joint venture in the project.

"Right now, the focus is New Millennium's DSO project, but that's just a short term phenomenon," said Jennings Capital's Peter Campbell. "What Tata's really interested in is the very large LabMag and KeMag project they have -- that's over 9 billion tons of resources."

Tata has first negotiation rights, until December, on the two taconite -- a low grade form of iron ore -- projects at LabMag and KeMag.

StarMine valuation data: r.reuters.com/tat48n

Separately, Consolidated Thompson Iron Mines Ltd last month shipped a first consignment -- about 165,000 tonnes of iron ore concentrate -- to its Chinese partner Wuhan Iron and Steel Group.

Top steel producer ArcelorMittal, which lays claim to around 3 billion tonnes of overseas ore reserves, has also announced a joint development with Wuhan, seeking iron ore self-sufficiency within 3-5 years.

"They (ArcelorMittal) are the fourth-largest iron ore producer and for some time have been securing their own access to iron ore to lessen their dependence on the big three," Campbell said.

Another firm sitting on a huge resource base and seeking a partner is Baffinland Iron Mines. It said in February it received interest from 20 companies to partner in its C$4 billion Mary River iron ore project in the Canadian Arctic.

"Both Mary River and New Millennium's DSO/LabMag/KeMag projects are attractive targets for the steel industry," said Meyer at Raymond James.

"The fact that Baffinland has shipped test cargoes to ArcelorMittal and ThyssenKrupp in Germany makes them the leading candidates," said Campbell, noting the German government has offered loan guarantees of more than $1 billion.

To date, the hungriest steelmills, in fast-growth China, have largely ignored Canada, focusing a spending binge in Australia, Brazil and Africa. This is partly because countries like India and Australia have a shipping cost advantage.

But other Chinese are now joining Wuhan in showing an interest in Canadian assets.

"It's nothing to do with the country, it's where assets themselves are located and are mineable to development," said CIBC World Markets analyst Ian Parkinson.

Xinxing Pipes Group Co Ltd last month signed a strategic partnership and investment with Advanced Exploration Inc, setting up the Chinese state-owned firm to buy a significant interest in its Canadian partner.

The Steel Index 62 percent iron ore benchmark has dropped to below $142 a tonne this week, its lowest in nearly 4 weeks and down almost a quarter from April's 2-year peak.

(Reporting by Aftab Ahmed in Bangalore, Editing by Ian Geoghegan)