Iron ore is the key element for the manufacture of steel, for which global demand and pricing remain strong thanks to
— Roger Conrad, Canadian Edge
With spot prices for iron ore hitting $180 per ton, whoever controls iron ore deposits is primed to mint money. What if I were to tell you that the largest iron ore deposit in the world is located in
What company is it? I’ve written about it before in my article Best Option Trades for 2011. I thought it was a good buy then, but the news on Friday (Feb. 4th) that it had acquired a controlling interest in an iron ore property that is potentially worth more than eight times the company’s current market cap makes me even more optimistic.
A Steelmaker is the Lucky Winner
Drum roll please . . . The lucky company’s name is Luxembourg-based ArcelorMittal (NYSE: MT), the largest steelmaker in the world. The Canadian company in which it has acquired a 70% controlling interest is Baffinland Iron Mines (
The operating costs at Baffinland are potentially so low that once the project is built, it can produce a profit through any cycle. Certainly at long-term iron ore prices in the order of $50 to $60 per ton, this project makes a lot of money.
Keep in mind that iron ore is currently priced at $180 per ton, more than triple the price Mittal says is necessary for Baffinland to “make a lot of money.” This acquisition truly could be the steal of the century!
To be fair, London-based Rio Tinto (NYSE: RIO) claims that the Simandou deposit in the West African country of Guinea – which it controls with a 53% stake – is the largest iron ore deposit in the world. Reserve estimates for Simandou, however, are only 2.25 billion tons, which is less than Baffinland’s 4-billion-ton-potential but more than Baffinland’s “official” estimate of 854 million tons.
There’s a Catch . . .
This begs the question why is there such a large discrepancy between Baffinland’s “official” reserve estimate of 854 tons and the “potential” reserve estimate of 4 billion tons. It might have something to do with the iron ore’s, uh, exotic location. I told you that the iron ore deposit is in
I’ve never been there, but they say that the
Did I mention high winds and frequent blinding blizzards? Altogether, these challenging weather conditions make mining the iron ore difficult to say the least. Queen’s University Professor of Mining Victor Pakalnis explains it this way:
Getting the ore out of the ground in a polar desert — considered
’s harshest environment — and loaded on to Europe-bound ships is a daunting task. You’ve got problems of remoteness, of weather, and of darkness. It’s a different environment than most of us are used to. Canada
There’s also the challenge of working with permafrost – permanently frozen ground. As permafrost melts over the summer months, the soil becomes weak causing buildings and roads and other infrastructure to shift. The shifting can destroy roads and railway lines.
According to some analysts, developing the infrastructure necessary to fly workers in to an airstrip, mine the iron ore, and then transport it via 89 miles of railway to ships docked at a to-be-constructed port at Steensby Inlet on
No wonder Baffinland’s iron ore deposit has remained undeveloped for half a century! But ArcelorMittal has sufficient financial strength to finally get the job done and exploit this valuable resource.
With the Help of Canadian Edge Iron Ore
The global rush for iron ore deposits will only accelerate in the years ahead as emerging markets like
Roger Conrad to the rescue! The editor of the market-beating Canadian Edge newsletter has uncovered a Canadian company with a much higher dividend yield that generates royalties from iron ore production. According to Roger, this royalty generator can pay higher yields than other iron ore investments because of its innovative stock-bond structure:
The company has converted from an income trust to a corporation traded as a staple share, or stock-bond hybrid. This move has allowed management to shelter income and pass more of it along to shareholders despite new taxes, even as market conditions for iron ore globally continue to improve and boost cash flows.
It adds up to a solid opportunity for income investors to cash in on another valuable Canadian natural resource.
To find out the name of this Canadian iron-ore stock that pays an above-average dividend, give Canadian Edge a try today!