City in Quebec suffers from collapse in iron ore prices

How this northeastern Quebec city is getting burned by the collapse in iron ore prices

Damon van der Linde

Financial Post

8 January 2016

SEPT-ÎLES, QUE. — At the corrugated-iron-walled congress centre in this northeastern Quebec city on a snowy late-November day, organizers of a chamber of commerce luncheon are turning away late arrivals. They’ve run out of extra seating for members of the business community who have crowded into a dining hall decked out in Christmas cheer. But they’re not here for merriment. They’ve come to a presentation by Luc Dion, president of Sept-Îles’ economic development committee, about the region’s economy.

The gift many were hoping for ahead of the festive season was some relief from the economic crisis that has been grinding deeper into the region for the last several years, since iron ore prices fell from a high of nearly US$190 a tonne in early 2011 to a low of US$37 mid-December.

But Dion’s message was not about optimism as much as it was about trying to put Sept-Îles problems in a global perspective. “I can’t say that it’s not worrying, but I wanted to show this is happening on an international scale, so it’s not about just our region, and we have to adapt,” Dion said in an interview afterward.

“However, at our core, we can’t really do anything else because we are on a land of natural resources. Our history is based on natural resources, whether it is fishing, forestry, mines, hydroelectric, aluminum — or iron ore.”

Sept-Îles lies on the north shore of the St. Lawrence River in eastern Quebec, just where it begins to widen out to the Gulf. The iron ore arrives by train after being mined in the Labrador Trough and is loaded onto ships for export, mostly to the U.S. and Europe.

For more than 60 years the Iron Ore Company of Canada (IOC) has been at the centre of the town’s industry. In 1949 IOC was officially incorporated and began construction on the 414-kilometre Quebec North Shore and Labrador Railway from the mining community of Schefferville, Que., before the Wabush project opened near Labrador City, N.L., in 1958.

The first shipment of ore left Schefferville for Sept-Îles on July 15, 1954, forging a link between the mineral and the people who live there that has meant both dependence and prosperity as the hub of Canada’s iron mining industry.

Today, IOC is a joint venture between the multinational mining giant Rio Tinto, which owns 58.7 per cent, Mitsubishi with 26.2 per cent and the Labrador Iron Ore Royalty Income Corp. with 15.1 per cent.

The iron ore business at the Port of Sept-Îles led to a major increase in population, and housing was quickly built to accommodate it. The town grew from 2,000 people in 1951 to 14,000 in 1961, and 31,000 in 1981. The latest data from Statistics Canada shows the population contracted to just over 25,000 by 2011.

With over 550 jobs in Sept-Îles and nearly 2,000 in Labrador City, as of 2014, IOC is a major employer in an area where seven per cent of the labour force is directly employed in the primary resource sector, compared to 2.6 per cent in the rest of Quebec.

Sept-Îles chamber of commerce president Marc Brouillette said that in the past year at least a thousand people have left the city. School enrolment records show that 200 families have moved away in the past six months alone.

“Our (small and medium-sized enterprises) have invested a lot of money in those people who have left the region and who might not come back,” he said.

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In November, at Montreal’s Queen Elizabeth Hotel, Export Development Canada chief economist Peter Hall gave a presentation of the organization’s newly released outlook for Quebec in 2016 and beyond.

Hall says quantitative easing in the United States following the 2008 recession artificially pushed up global commodity prices by putting cash into the market, and now that liquidity is being taken back.

The bad news, he said, is that prices are down and industry is having to readjust to a new reality. The good news is that the global economy is showing real growth that will eventually mean a healthy, sustainable demand for commodities.

Although Hall said he doesn’t see a turnaround in commodity prices until the first quarter of 2017, he does see one coming.

“If you’re still at the table you can participate in the growth as long as you can manage through the period of volatile prices,” he said in an interview. “That’s true for just about every category except iron ore.”

What makes iron ore a challenge, Hall said, is that it is being driven by the over-expansion of the Chinese steel industry, now experiencing a huge drop in demand as the country feels the chill of a slowing economy.

The biggest miners have responded by cranking out as much cheap iron as possible, including hundreds of millions of tonnes from Western Australia.   

Leading this glut are Anglo-Australian BHP Billiton, Brazil’s Vale SA and Rio Tinto.

In 2000 Rio Tinto completed an aggressive acquisition of North Limited, an Australian company with iron ore and uranium mines, for US$2.8 billion. At the centre of this purchase were the Pilbara operations in Western Australia, which shipped out 288 million tonnes in 2014.

As part of the deal, Rio also picked up the Iron Ore Company of Canada, as North had majority ownership of the operation. IOC’s 2014 iron ore sales totaled 14.3 million tonnes with a higher cost of production than Pilbara.

According to Axiom analyst Gordon Johnson, this oversupply is creating a race to the bottom for iron ore prices, and is largely responsible for the attrition of smaller producers such as IOC.  

“Rio Tinto is one of the key agitators of this oversupply, there’s no doubt about it,” Johnson said.

In 2014, Cleveland–based Cliffs Natural Resources Inc. closed its Bloom Lake, Que. property and laid off 400 employees because it was unprofitable at current iron ore prices. Cliffs had purchased the property for US$4.9 billion in 2011 at the top of the iron ore market.

In December 2015, Quebec Iron Ore Inc., a subsidiary of Champion Iron Ltd., agreed to pay a bargain $10.5 million for the mine, railway and mineral claims, although it will also have to assume reclamation liabilities assessed at about $41 million and is not projecting to begin production again any time soon.  

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Thierry Martel, IOC’s vice-president of technical services looks out from a bridge above railway cars that stretch down the track where the iron arrives in Sept-Îles from Labrador City, 300 km away. From a distance, the mounds of ore sparkle a slightly different colour of rusty grey depending on whether the cars are filled with fine crushed iron or marble-sized pellets.

“The drop in the market directly impacts our bottom line and makes it very difficult for us to be competitive in prices at that level,” said Martel who worked at Rio Tinto for 12 years in the U.S. and Malaysia, before taking his post at IOC in 2014.

The train passes under the bridge two cars at a time and into a building where each car, carrying 100 tonnes of iron ore, is flipped over and its payload readied for loading onto ships.

As impressive as this machinery is, it is not nearly as modern as the equipment used in Australia, where behemoth driverless dump trucks haul iron 24 hours a day.

“Older facilities like IOC have not necessarily invested in a lot of automation,” Martel said.

Until the company can secure investments to upgrade the facility, it has to improve efficiency with what it’s got, a strategy Martel said relies heavily on leveraging the expertise of IOC’s employees.   

“The capabilities within our people are a huge benefit for us,” he said. “They understand our mine, they understand our processing facilities and we draw on those capabilities to seek ways of improving.”

There have been improvements to increase production to 14.8 million tonnes in 2013, and hopefully run at a full 18-million-tonne capacity when there is sustained demand.  

Last April, Raymond James analyst Alex Terentiew wrote to investors in the Labrador Iron Ore Royalty Corp. that there was a high risk of IOC shutting down production before the end of 2015.  His report only added to uncertainty surrounding the company — rumours began circulating as early as 2012 that Rio Tinto was looking to sell its stake in IOC.

“Our analysis suggests that, at current iron ore prices, the mine is losing money on a cash basis,” wrote Terentiew in April.

Since then, the approximately 2,000-employee company has cut 100 jobs and temporarily idled three of its six pellet-making lines.

“Recent significant operating cost improvements, combined with improved productivity, have substantially reduced the risk of IOC facing a shutdown or making an equity call on its shareholders, should iron ore prices decline materially,” Terentiew wrote in a note in November.

This is not the first time Sept-Îles has been burned by a collapse in iron ore prices. In the 1980s the town was hit hard by an increase in global production that drove the value down.

The chamber of commerce’s Brouillette said the situation is better today because there has been some diversification into other materials such as aluminum; before, iron ore was almost the sole source of revenue for the city.

However, unlike before, these days very few are immune to the effects of these global forces.

The two Sept-Îles-area Innu reserves — the Maliotenam and Uashat Mak Mani-Utenam — are for the first time feeling the impact of the global economic crisis, brought on by the crash in ore prices. During the iron ore crisis of the 1980s, the lives of the Innu people changed very little, said Uashat lands and resources officer Jean-Claude Pinette, because the First Nations population held few jobs in the mining sector.

“In the past we were set aside of the economy. We were not included and we were not allowed to be part of it,” Pinette said. “We just saw the city going down, but we were already down at the time.”

The recent closing of the Bloom Lake property, for example, has meant 160 members of the community losing their jobs. “This is probably the first generation of Innus that are really impacted by recession,” Pinette said. “That’s really new for us.”

Further complicating the situation, the Innu are in the midst of a $900 million lawsuit against IOC, claiming damages to the environment and the First Nations community over the past 60 years. They recently won a victory at the Supreme Court of Canada, which means that IOC either has to fight the lawsuit or come to some sort of a settlement.   

Meanwhile, many members of the Sept-Îles business community are asking that the government do more and start injecting cash and investment into the area.

In April 2015, the government of Quebec with much excitement launched the Plan Nord, a natural resource-heavy strategy to increase development and industry in the province’s vast northern region.

But with another grim year coming to an end, it was clear that by December people were already impatient waiting for these promises to come to fruition. “If we are obligated to wait until more investors arrive, we don’t have the means right now,” Brouillette said. “We need more money to give us a bit of breathing room.”

A few weeks ago, 16 Sept-Îles business owners sent an open letter to Premier Philippe Couillard’s government to point out that the government’s big plan wasn’t exactly helping. So far, “more than 1,000 jobs have been lost in the past three years because of lower metal prices,” the letter said. By comparison, they added, Plan Nord, after hiring some administrators, had as of December created a grand total of six.