KWG VP sheds light on conflict with Cliffs
Rail access and natural gas processing proposed for economically sustainable development of Ontario resource.
Anyone who has been following the story about the huge chromite discovery in Northern Ontario’s Ring of Fire knows there’s no love lost between junior miner KWG Resources and its rival – and partner – Cliffs Natural Resources.
The relationship started off on a positive note in 2008 with Cliffs taking a 19.9 per cent interest in KWG, but went downhill – ostensibly over a difference of opinion on the transportation infrastructure required to access the remote site, KWG deciding on rail as the only way to go and Cliffs opting for a road.
In a speech at a Sudbury and District Chamber of Commerce luncheon April 3rd, Moe Lavigne, KWG Resources’ vice-president of exploration and development, revealed some of the reasons for the bad blood, questioned Cliffs’ motives and laid out his own company’s vision for the development of the Ring of Fire.
“KWG and Spider (Resources) intersected chromite in the Ring of Fire in 2006,” said Lavigne. “It wasn’t an impressive intersection and we didn’t do anything about it. The following year, Noront Resources discovered the Eagle 1 nickel-copper-PGE deposit.”
As exploration activity intensified, Noront, KWG, Spider, and Freewest Resources made additional chromite discoveries, revealing a 12-kilometre long trend, 40-metres thick.
“Chromite deposits are typically very continuous,” said Lavigne. “You can trace them out for miles and miles, so I thought to myself, OK, 12 kilometres long, 40 metres thick, what’s it worth? A half a trillion dollars. We need a railroad.
“But we’re not a mine developer. We’re just a junior exploration company, so one of our directors had worked for Cliffs and, in 2008, we started a discussion with them.
We asked them if they were interested in chromite. They said ‘Sure. We’re a supplier of raw materials to the steel industry and chromite is another one of those raw materials,’ so they became a 19.9 per cent shareholder of KWG and took a seat on our board of directors.”
KWG hired Minnesota-based consultants Krech-Ojard and Associates and Golder Associates to study the potential for rail access and carry out geotechnical studies.
“All this time, it was Cliffs pushing us in this direction,” said Lavigne. “We were burning a half million dollars a week operating five drills, four helicopters and three camps. Before we started this, we told Cliffs we don’t have the money to cover these bills. They said, ‘No problem. Come and see us when you need some money.’
When KWG did go knocking on their partner’s door with $4 million in bills to pay, revealed Lavigne, “they offered us $13 million to buy the project, which is about the amount of money we had invested in it. Now, we realized why they were pushing us to get this work done. They were pushing us into a financial corner. That’s when we realized who our partners were. “By coincidence, the following week, we were mentioned in the provincial throne speech and our stock doubled. Our CEO, Frank Smeenk, went to the market, got $10 million, paid our bills and we went our own way.”
Cliffs went on to buy Freewest and KWG partner, Spider Resources, giving it 100 per cent ownership of the Black Thor chromite deposit and 70 per cent of the adjacent Big Daddy property, leaving KWG with 30 per cent of Big Daddy.
“At that point, “they evicted us from their camp and sent notification to the Ministry of Natural Resources that they intended to build a road (to the Ring of Fire).”
The route they decided on was on land staked by KWG subsidiary Canada Chrome along a narrow esker – and the only high, or higher, ground in the area – snaking north from the CN rail line west of Nakina.
“The Ministry of Natural Resources said, ‘You need to speak to KWG Resources to get an easement,’ and we refused consent.”
Cliffs referred the matter to the Ontario Mining and Lands Commissioner, who sided with KWG in a decision handed down September 10th last year.
Lavigne admitted to being puzzled by Cliffs’ insistence on a road.
“Five years ago, there was no discussion about road or rail. It was all rail. I don’t know why Cliffs changed its mind to go with trucking. They understand railroads very well. Their Labrador and Minnesota operations rely on railroads.”
A Tetra Tech study commissioned by KWG for the Mining and Lands Commissioner hearing estimated it would cost $180 million a year to maintain a road and $60.78 for each tonne of ore hauled, assuming a three million tonne per year production scenario.
The equivalent costs for rail were pegged at $31 million per year for maintenance and $10.50 per tonne of ore hauled.
“For material worth as little as $200 per tonne, to strip away $60 of that is huge,” said Lavigne. Tetra Tech estimated the capital cost for the construction of a railroad at $1.55 billion, versus $1.05 billion for a road, but projected the extra cost would be recovered in six years. “Even if you’re only operating this mine for 12 years, you’re going to save a lot of money, and make a lot of money,” said Lavigne. “So, there’s no doubt that a railway is the way to go … It’s still the sound financial decision to make.” Cliffs is appealing the decision of the Mining and Lands Commissioner in Divisional Court June 16th, so the matter is still unresolved but, said Lavigne, “an easement is an instrument utilized by all levels of government to facilitate the installation of public infrastructure for the greater good. It’s not meant to be a mechanism by which private sector competitors raid each other’s assets.”
Gas or electricity
Transportation infrastructure isn’t the only issue on which the two companies differ. They also have divergent views on ferrochrome processing technology and power. Cliffs favours electric arc furnaces and has lobbied Ontario for a break on electricity prices, while KWG is proposing a natural gas solution.
“KWG,” Lavigne told his Sudbury audience, “is not really in favour of having taxpayers subsidize private sector corporations by paying their electricity bills. We need to come up with another solution, and we found one here in Sudbury with XPS (Consulting and Testwork Services)…using natural gas instead of electricity.
In a press release issued the day prior to Lavigne’s talk, KWG announced further test results from XPS indicating “substantial” cost savings using natural gas to convert chromite into a metallized chrome and iron alloy.
Energy costs, the company reported, would be “less than half those required for conventional (electric- powered) technology, while greenhouse gas emissions and capital costs would also be considerably lower.
Using natural gas with an accelerant, the patent-pending XPS refining technology begins the reduction process at 900 degrees Celsius and is completed at 1100 degrees Celsius.
“The electric arc furnace tests we did at XPS reduced chromite at 1650 degrees Celsius,” noted Lavigne. “That spread of temperature is not a linear spread. It’s an exponential spread. Gas saves you energy, but gas is also the same price right across the country, so it’s the great equalizer.
“We’re now at the point where we have to ramp up this research to take it to the next scale,” said Lavigne. “That’s going to be expensive. I need to go up to the Ring of Fire and take out 10,000 tonnes of rock. That’s not an easy feat.
“Between lowering the transportation cost by using a railroad and using natural gas, we’re now making the mining of the chromite deposits in the Ring of Fire economically sustainable,” said Lavigne. “Last September and October, there was a lot of stuff in the press from Cliffs pointing fingers at everybody as to why they were pulling out of the Ring of Fire, but they always said, ‘This is a great project.’ To me, that means they’re hoping to sell it. They never talked about project economics in their press releases (because) their project didn’t make money.
If you impose high costs by hauling out ore by truck and high costs of running an electric arc furnace in Ontario, your project becomes uneconomic,” said Lavigne. “Eventually, Cliffs’ technical team would have to present to the company’s board of directors to get permission to spend $3.5 billion on this project, but I don’t think that day would ever come with their mining and processing plan.”
Lavigne offered the experience of Finnish miner Outokumpo as a model for the development of Ontario’s chromite discovery.
According to Lavigne, Outokumpu was established by public and private funding and morphed into a mining and technology powerhouse.
“In 1959, chromite was discovered at Kemi in northern Finland. It took five years to delineate the deposit. The problem was that it was only 26 per cent chrome oxide and most of the deposits then being exploited were 40 to 45 per cent chrome oxide. The grade wasn’t high enough, but it was a very large deposit and they wouldn’t let it go. They said, ‘This is an opportunity that we have to make money from.’”
Over the years, Outokumpu overcame the problem related to their lower grades by developing their own technology, producing a reasonable grade lumpy ore and pellets from a fine concentrate. They also spun off a sister R&D company called Outotek and went into the stainless steel business.
“Chromite goes in one end and stainless steel comes out the other,” said Lavigne. It makes perfect sense because “once you heat your material, you want to keep it warm going into the next process. Otherwise, you need to cool it down, ship it to another plant and spend a whole bunch of money heating it up again.
“Today,” said Lavigne, “Outokumpu is the largest stainless steel producer in the world.
“It took a vision and the government of Finland stood behind it from day one up to the point in time when the company was completely privatized.
“This has happened in Canada. We have a lot of mining companies that grew in a very similar sort of trajectory and I think the chromite in the Ring of Fire is an opportunity for us to do it again.
“The Ontario Northland Railway (ONR) was put in place 100 years ago do develop northeastern Ontario. We’ve done this before, we think we can do it again and we think the ONR is the vehicle we should use to develop (the Ring of Fire).”