If you're excited by natural resources stories, you'll like this one.
Last week Stephen Pearce, chief financial officer of Australian iron ore miner Fortescue Metals, said something that that caught my eye. He reported a recent rebound in the iron ore price, saying that it highlighted "the fundamental shortage of seaborne supply against a continuing strong demand profile from developing countries".
You may already know that iron ore is crucial to the urbanisation of developing nations. China, in particular, relies upon the ship-loads of iron ore that are disgorged in its ports daily. It can't build its cities without it.
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Now China has iron ore of its own. The problem is, it's low grade and remote. And there is little prospect of China reducing its dependence upon imports. Sixty percent of world iron ore production ends up on a ship, and the majority of this is bound for China.
This dependence by China upon imports is making it feel uncomfortably at the mercy of the world's big three iron producers: Vale, Rio Tinto and BHP Billiton. This trio represent two-thirds of seaborne trade.
In addition to all this, there have been rumours that Brazil may choose to capture the added value of converting iron ore into steel rather than exporting it in its crude form. There are also question marks over the longevity of Australia's massive Pilbara iron ore resource.
This is an avenue of opportunity for one place in the world. It is thanks to these strategic pressures upon China that one region could emerge over the next five years as the world's third largest source of seaborne iron. This is the West African country of Guinea
Why Guinea could be the next big player in iron export
Guinea lies at the heart of the iron industry's new region of focus. Each of the three global mining behemoths has iron ore projects in West Africa. Both Vale and Rio Tinto have concessions over the Simandou field in south-eastern Guinea and expect to be in production in 2012 and 2015 respectively. Meanwhile BHP Billiton is at an earlier stage with its projects in Guinea and Liberia.
Not least because of its geological similarities, West Africa is now being called the new Pilbara. And where the major miners go the juniors inevitably follow. Those quoted on the London Stock Market are Afferro (AFF); African Minerals (AMI); Bellzone (BZM); London Mining (LOND); Zanaga Iron Ore(ZIOC); and a newcomer West African Minerals (WAFM).
The latter boasts the highly successful mining entrepreneur Stephen Dattels as its executive co-chairman. When I met Dattels recently he was clearly excited by the prospects for its portfolio of licences in Cameroon and Sierra Leone but also well aware of the pitfalls.
One of these is an understanding of the difference between haematite ore and magnetite ore. The former, often called direct shipping ore', can be taken out of the ground and put on a ship untreated. As Dattels told me: "If you can dig it out of the ground for $40 per tonne and put it on a ship for $140 per tonne, you should have a successful business." Magnetite, by contrast, is lower grade and it must be processed before it is shipped, adding considerably to its cost.
Like many mining executives, Dattels thinks of the industry as one big exercise in shifting material. Finding metal and extracting it is the easy part. The challenge is to get it to market and this is especially so when your mine lies several hundred miles inland in Africa.
Rio's Simandou project, for example, involves the construction of 650km of railway. The $4.7bn cost of Sundance Resource's Mbalam project in the Cameroon, meanwhile, included $2.6bn for rail and port facilities, as revealed in an excellent recent report by Fairfax's Carole Ferguson.
Ferguson also points out that these capex projections have a nasty habit of proving too conservative. London Mining's initial estimate of a $55m cost for a 1.5 million tonnes of annual production soon became $234m for 3.5mtpa of production. The latest announcement of project costs for African Mineral's Tonkolili iron ore project showed costs escalating by $284m.
How iron juniors could profit as China wades in
With such large capital requirements the Chinese are seizing the opportunity to cut their way into the region by financing infrastructure projects. The murky background and inscrutability of these Chinese groups adds one level of risk. When you add into the mix the tortured political history of the region, an investment into West African junior iron ore miners is, as Ferguson says "not for the faint hearted".
Nonetheless with operating costs in West Africa comparing well with those in the Pilbara, she concludes that "there are high returns to be had from the right type of project and this will continue to attract capital to the sector".
Bearing in mind the attractions of haematite ore over magnetite, the infrastructure challenge and the need for deep pockets', Fairfax favours the ASX-listed Equatorial Resources (ASX: EQX); West African Minerals; London Mining; and Bellzone.
So there are a few ideas it could be worth taking a closer look at. I'll add them to my need more research' list for now.
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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