Peter Koven, Financial Post · Mar. 8, 2011 | Last Updated: Mar. 8, 2011 8:55 AM ET

With China's helping hand, Canada is poised to be a major player in iron ore for the first time. Chinese money is pouring into greenfield iron ore projects in the Labrador Trough, paving the way for a huge increase in Canadian production and a transformation of the local economies in Quebec and Newfoundland and Labrador.

"I wouldn't be surprised to see Canada at 120 or 140 million tonnes a year of seaborne production down the road," says Allen Palmiere, chief executive of Adriana Resources Inc., which just struck a partnership with a Chinese steel producer.

While Canada is among the world leaders in production of most major resources — oil, copper, gold and potash among them -it has never been a serious player in iron ore, currently the biggest driver of the bulk commodity trade.

Canada produces fewer than 40 million tonnes of iron ore a year right now for a seaborne market that's bigger than one billion tonnes. Brazil and Australia dominate it with their vast deposits.

With prices reaching unprecedented highs of about US$200 a tonne on surging demand from Asian steel companies, there has never been a better time to get into this space, and a group of Canadian companies is now pushing a new generation of iron mines into development. In fact, a couple of new iron ore companies will hit the public markets in the coming weeks.

These companies hold deposits with a lot of potential, but they require many years and huge amounts of capital (in some cases billions of dollars) to get into production.

That is where China comes in. Chinese steel companies are desperate to secure new iron ore supply and rely less on the "big three" producers (BHP Billiton Ltd., Rio Tinto Ltd. and Vale SA). In recent weeks, there have been a flurry of Chinese deals with Canadian juniors, and more are expected.

"We have potential offtake partners from China banging down our door. And here we don't even have a published resource yet," says Mark Morabito, CEO of Alderon Resource Corp.

"The Chinese made a decision that they wanted to be more aggressive in securing offtake. That required them to go to up-market, earlierstage companies. And that's what they've done."

So far, there has been only one true success story among the new crop of Canadian iron ore companies: Consolidated Thompson Iron Mines Ltd., which was recently sold to Cliffs Natural Resources Inc. in a $4.9-billion deal. It built the first new Canadian iron ore mine in decades. Baffinland Iron Mines Corp., a junior company with a massive deposit in Nunavut, was also sold after a heated auction.

Ever since those deals, the share prices of the junior iron ore companies have run wild as investors finally took notice of them.

The group includes Adriana, Alderon, Champion Minerals Inc., and New Millennium Capital Corp. They form the foundation of a genuine Canadian iron ore space.

Two new companies are now entering the game: Century Iron Mines Corp., which holds two promising deposits in the Labrador Trough; and Northern Iron Corp., which is reviving an old Stelco mine in Ontario. Northern should close an initial public offering in the spring, while Century is raising more than $100million in a reverse takeover that includes Chinese investments.

Since Canada is one of the only countries in the world with emerging iron ore production, it is no surprise that China is looking here. The order for Chinese steelmakers to expand globally came right from the top: In February, a senior official with the China Iron & Steel Association revealed that China wants to derive 40% of its iron ore imports from its own offshore projects by 2015.

The first sign of China's interest in Canadian iron ore came in March 2009, when state-owned Wuhan Iron and Steel Corp. (WISCO) agreed to invest US$240-million in Consolidated Thompson shortly after the financial crisis.

The money allowed Consolidated Thompson to finish building its Bloom Lake mine when raising money was almost impossible, and WISCO got guaranteed offtake.

More recently, WISCO cut separate deals with both Adriana and Century Iron. In each case, WISCO will get equity in the companies and major stakes in the joint ventures that will develop the projects.

So while the Canadians will build the mines, the Chinese will have a big say on development. China Minmetals Corp., one of China's biggest mining companies, is also involved with Century Iron.

"WISCO has a huge appetite for iron ore, and this [deal] is something that has been in the works for two years," says Harvey Macken-zie, who is bringing Century Iron to the public markets before turning it over to new management.

Chinese companies were also very keen to purchase Baffinland, but did not pull the trigger quickly enough and the company was sold to steelmaker ArcelorMittal and private company Nunavut Iron Ore Acquisition Corp.

Adriana's Lac Otelnuk project is a good example of the kind that needs Chinese money if it hopes to go ahead.

The deposit is absolutely massive: It could produce greater than 50 million tonnes of iron ore a year, or more than the whole country produces right now.

It is also in the middle of nowhere in Northern Quebec, and getting it out of the ground and to port will cost billions of dollars and take many years.

"It is by far the biggest mining project in Canadian history," Mr. Palmiere says.

"The capital markets will not fund that kind of project, but China can."

China is also looking toward more modest, smaller-scale projects, such as Alderon's Kami deposit in the heart of the Labrador Trough. Mr. Morabito thinks Chinese capital will ensure that all these projects get developed in the current commodity cycle.

Perhaps the only surprising thing is how long it took Canadian investors to catch on to the fact that the country is building a major iron ore sector. But now that they have, it seems like they cannot get enough of them. Adriana had minimal liquidity as recently as last fall; now it averages about 300,000 shares a day.

" The Consolidated Thompson and Baffinland takeovers got the attention of the market watchers. But before that was happening, China's interest was already apparent to us," Mr. Morabito says.

With China acting so aggressively to secure iron ore offtake in Canada, industry experts say the next major player to watch is India.

Witness Monday's announcement that India's largest steelmaker, Tata Steel, signed a binding agreement with Canadian iron ore miner New Millennium Capital Corp. to develop the taconite iron ore deposit in Canada.

"The Chinese firms have been so aggressive that they've been driving Indian firms to the spot market, because they've been beat out on all the [iron ore] offtake," Mr. Morabito says.

"So now the Indians are showing up."