The Ontario government and Matawa First Nations have reached a negotiation framework agreement to discuss how to develop the world-class Ring of Fire mineral belt in Northern Ontario where Cliffs Natural Resources (NYSE:CLF) owns huge deposits of chromite.

The company has been unable to develop its assets here owing to lack of agreement among stakeholders on key issues related to environment, revenue sharing, community infrastructure, etc. Also, the region is totally isolated from the rest of the country and needs massive investment to develop connecting transportation infrastructure. This itself has been the subject of an acrimonious court battle between Cliffs and KWG Resources, which controls the land where the key transportation route lies. [1]

Therefore, while an agreement on a common framework is definitely a good first step, it is still going to take a lot of time to negotiate and agree to specific terms and conditions. This means that Cliffs’ investors will do good not to get their hopes up for now. The Black Thor project, right now in the suspended state, is unlikely to be revived any time soon.

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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, if and when production begins. Cliffs has a capital expenditure budget of close to $3.3 billion for this project and had already spent around $500 million by the end of 2012. 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. Canada is the only potential large scale supplier which is politically stable, doesn’t need chromite for its own consumption and can produce it at low costs. [2]

The Story So Far

The Ring of Fire project has been very unpopular with the First Nation communities in Ontario. These are autonomous aboriginal communities who live in the adjoining areas and are concerned about jobs, business opportunities and improved infrastructure. Due to the diverse nature of these communities and their wide-ranging concerns, progress had been slow and negotiations complicated. Another area where progress had been tardy is the signing of definitive agreements between Cliffs and the Ontario government. These agreements pertain to the lack of infrastructure in the Ring of Fire area and were deemed critical to the project’s economic viability. In view of these problems, Cliffs had put the project on hold temporarily in June. [3]

In September, Ontario’s land and mining commissioner had dismissed Cliffs’ application for permission to build a road to its deposits at Black Thor. This road was proposed to pass through a region claimed by rival miner KWG, which wants to build a railroad instead. The region is too fragile to support two heavy ore transportation systems. While Cliffs proposed a $600 million road, KWG proposed a $1.6 billion railroad. However, the province of Ontario was expected to share half the cost of building Cliffs’ proposed road. The tribunal objected to the province paying for a private road that would bring no benefits to the general public. [4]

The company claimed that building an all-weather surface road was the only way to make its $3.3 billion project viable. In view of the adverse ruling, it declared that the project had been put in jeopardy. Although Cliffs appealed against the ruling in Ontario’s Superior Court of Justice, it knew that any appeal takes years to make its way through the court. The company continued to believe that a real solution can only be found by the Ontario government.

The Ontario government has finally managed to get its act together. Prior to successfully negotiating this agreement with First Nations communities, the government announced last month that it had appointed Deloitte as a neutral, third-party resource for stakeholders such as First Nations, the provincial and federal governments and industry. The firm will help in establishing the development corporation that would be responsible for coordinating infrastructure in the Ring of Fire region.

There Is Another Battlefront For Cliffs

On January 28, the hedge fund Casablanca Capital filed a Schedule 13D document with the Securities and Exchange Commission where it disclosed its 5.2% shareholding in Cliffs Natural and included a letter sent by the fund to the company’s board. The fund said that Cliffs should bundle its Bloom Lake project and Asia Pacific operations into an independent entity. According to the fund, Cliffs’ international business is exposed to the seaborne iron ore market and has a different risk/reward profile than its U.S. business where barriers of entry for other players are high. The letter included other proposals about increasing dividends and corporate structuring of the U.S. business. The fund’s thrust was on unlocking value for shareholders and boosting the stock price. [5]

Casablanca also wants Cliffs to divest its chromite and nickel projects to concentrate fully on its core U.S. iron ore business. If Casablanca mounts a proxy battle and gains control of Cliffs’ board, one can be sure that the company’s chromite assets will be sold off.

We will have to wait and watch how the situation on the two fronts unfolds simultaneously going forward. We will keep you updated with any further significant developments.

Our price estimate for Cliffs Natural Resources is $25 after the latest results.

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1. Ontario, First Nations ink RoF regional framework agreement, Mining Weekly [↩]
2. GUEST OPINION: Ring of Fire: Strategic Chromite and the Commodity Supercycle, Canadian Mining Journal [↩]
3. Cliffs Natural Resources Temporarily Suspends its Chromite Project Environmental Assessment Activities Pending Resolution of Various Issues, Cliffs News Release [↩]
4. Road to Ring of Fire nixed, The Chronicle Journal [↩]
5. Casablanca Capital Letter To Cliffs Natural, SEC [↩]