The Largest Iron Ore Deposit in the World

Iron ore is the key element for the manufacture of steel, for which global demand and pricing remain strong thanks to Asia’s continuing need to build out its essential infrastructure.

— 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 Canada, with high-grade reserves estimated to equal up to 4 billion tons? Simple math tells us that this Canadian treasure trove could be worth upwards of $720 billion ($180 per ton*4 billion tons). Yet – and this is the amazing part – a company just acquired a 70% stake in this vital natural resource for a little less than $400 million!

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 (Toronto: BIM.TO). It seems only fitting that the largest steelmaker in the world should now be in control of the largest iron ore deposit in the world. Since iron ore is the key raw material used to produce steel, having a captive supply of the stuff is a big advantage for any steelmaker. In ArcelorMittal’s earnings conference call yesterday (Feb. 8th), CEO Lakshmi Mittal was extremely excited about the Baffinland acquisition:

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 Canada but what I didn’t mention is that it’s located on Baffin Island in the northernmost section of Canada . . . the Arctic Circle to be exact. It’s so far north that on a map it looks to be situated closer to Greenland than to Toronto.

I’ve never been there, but they say that the Arctic Circle gets rather cold and dark. For example, in the winter the average temperature on Baffin Island is 18 degrees below zero (Fahrenheit) and 24-hour darkness is the norm. When the sun sets on November 22nd, it doesn’t rise again until January 19th. For the entire year, Baffin Island gets only 3 ½ months of daylight.

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 Canada’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.

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 Baffin Bay will cost more than $4 billion dollars.

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.

Profit From Iron Ore With the Help of Canadian Edge

The global rush for iron ore deposits will only accelerate in the years ahead as emerging markets like China and India continue to industrialize and demand steel to build infrastructure. For income investors, however, neither ArcelorMittal’s 1.7% dividend yield nor Rio Tinto’s even more paltry 1.2% dividend yield are high enough.

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!