Toronto, 12 January 2011

A C$4.1 billion ($4.14 billion) bid for Consolidated Thompson could open the door to further Canadian iron ore deals as steel-makers step up a quest for high-grade raw materials to meet booming Asian demand. Cleveland, Ohio-based Cliffs Natural Resources is ponying up C$17.25 a share for Consolidated Thompson, a rich 29 percent premium from Tuesday's close that cements Canada's investor-friendly appeal in the global grab for resources.

"For iron ore, it's all about infrastructure, availability and capacity," said Haywood Securities analyst Geordie Mark. "Canada has the capacity, it has the resources, and obviously it's a favorable jurisdiction geopolitically."

In 2009, Canada was the world's ninth-largest producer of iron ore, shipping 31.7 million tonnes of the material. By 2018, analysts expect Canada to produce somewhere between 72 million and 102 million tonnes a year as new mines open up in areas once considered too remote and expensive.

The push for resources has made hot items out of Canadian deposits that have remained undeveloped for decades. Baffinland Iron Mines Corp , sitting atop a huge deposit discovered in the 1960s, is subject of a bidding war between ArcelorMittal, the world's largest steelmaker and Nunavut Iron, backed by U.S. private equity.

The battle started in September and focused market attention squarely on the Arctic territory of Nunavut. The remote Mary River project could supply iron ore to all of Europe for many years, once costly infrastructure is in place.

Cliffs' bid for Consolidated Thompson will pull that market focus back to the iron-rich Labrador Trough region of Canada, where infrastructure is already in place. "The whole area, up in Quebec and the Labrador iron ore trough region, is actually heating up quite a bit," said Stonecap Securities analysts Gary Hon. "I think we're going to see more M&A actions in the area going forward."

That could be good news for small explorers like Champion Minerals , Alderon Resource Corp and future producers Labrador Iron Mines and New Millennium Capital , all active in the region.

IRON BELT MERGERS

The Labrador Trough straddles the border between the provinces of Quebec and Newfoundland and Labrador, and is already mined by Cliffs, Rio Tinto's Iron Ore of Canada, and ArcelorMittal Canada.

Consolidated Thompson became the region's first Canadian producer in 2010, with annual output of close to 8 million tonnes of iron ore concentrate. Shares in the Toronto-listed company have risen over 1,300 percent in two years.

Shares of Labrador Iron, the next Canadian firm scheduled to start production in the region, are up over 1,600 percent in the same period. The company targets direct shipping of 2-3 million tonnes of high-grade ore by the end of this year. New Millennium has an exclusivity deal with India's Tata Steel to develop its KeMag and LabMag deposits. That option expires in February, and analysts say other steelmakers will come knocking if Tata backs down.

For investors banking on future growth, analysts point to Champion and Alderon, both with deposits near producing mines. "They are of interest to people who are already producing, or to other companies who are interested in getting into Canada or the Labrador Trough," said Haywood's Mark.

Champion's Fire Lake mine will cost just under $1 billion to develop, and could produce 7 million tonnes a year, while Alderon's Kami project would cost about $700 million to develop, and produce 8 million tonnes a year.

"The expensive part is infrastructure, which means ports and rail," said BMO Capital Markets analyst Tony Robson. "Rail can cost you up to $5 million per kilometre and a port can be many hundreds of millions of dollars."

For juniors with projects in the Labrador Trough, rail is not a major concern as extensive lines already exist. But ports are privately owned, so new players would have to build their own facilities, pointing to joint ventures or takeovers for companies like Champion, Alderon and Adriana Resources.

HOT DEMAND?

Adriana needs about $6 billion to develop its Lac Otelnuk project in the Labrador Trough, some 170 km (110 miles) north of the rail line to the Sept-Iles port area. Baffinland's Mary River project, 3,000 km (1,900 miles) north of Toronto, has a $4 billion price tag.

Both projects would produce high-grade ore, but success will hinge on strong demand and high annual shipments. "If China doesn't grow, we will reach equilibrium of iron ore production and demand by 2013. This could lead to falling iron ore prices," said BHF Bank analyst Herman Reith.

Iron ore prices are around $175 per tonne and most analysts expect them to stay around $90 a tonne over the long term. "Most of the producers we are talking about would have cash costs of under $50 per tonne, leaving a substantial margin," said Robson. "On the basis of that, both the debt and equity markets are likely to be willing to fund a few more junior developments."

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