Low prices and high supplies are driving iron ore prices down. Analysts say large companies will survive the crunch but many smaller producers and explorers may be faced with tough decisions.

In a red and muddy clearing along Cameroon’s densely forested border with the Republic of Congo, a fleet of diggers stands idle.

High above the canopy of trees, dark clouds start to gather. It is an ominous portent for an iron ore project billed as transformative for the country.

Three years ago, the Mbalam mining project, spearheaded by Australian explorer Sundance Resources, was hailed by Cameroon’s President Paul Biya as a potential game changer for the Central African country.

Now, as Sundance courts fresh investors to shore up its dwindling cash reserves while iron prices fall, the prospects look bad for the construction of a $5bn railway needed to make the mine economical.

Across the continent, a similar pattern emerges. From Guinea to Angola, mining projects set up to feed China’s seemingly insatiable appetite for raw materials face an uncertain future.

Demand from the world’s largest consumer of iron ore is now cooling, and the determination of the three biggest producers – Rio Tinto, Vale and BHP Billiton – to plough ahead with expansion plans is bad news for smaller rivals, many of whom have chosen Central and West Africa’s undeveloped – and thus higher cost – deposits as their way into the mix.

The combination of reduced demand and oversupply is pushing prices down. Since the beginning of the year, the price of seaborne iron ore has fallen 37% to just over $84/tn in September.

The sharp fall in prices evident this year is in some ways the corollary to the boom years between 2004 and 2010. Prices jumped from $25/tn to $170/tn by the end of the decade as China built the skyscrapers, roads and bridges needed to serve its rapidly expanding economy.

In response, iron ore producers invested in new mines, thus ensuring a supply shortfall would be replaced with a glut. Now, with inventories at Chinese ports close to record levels, coupled with a seasonal fall in demand, prices have headed south. So much so, in fact, that Goldman Sachs, the New York-based investment bank, said 2014 would come to be seen as the end of the iron age.

Minnows get caught

This may not be too big a problem for companies like BHP Billiton and Rio Tinto, which benefit from vast economies of scale that allow them to remain profitable even at iron prices of around $30/tn.

For smaller companies like African Minerals, London Mining and Bellzone, which operate a comparatively tiny portfolio of mines at much higher cost, a sustained fall in the iron ore price is a far harder squall to surmount.

African Minerals and London Mining operate mines in Sierra Leone, while Bellzone is in Guinea. All three miners have been seeking fresh funding to relieve some of the pressure on their balance sheets.

In August alone, London Mining got a fresh credit facility from two banks, while African Minerals and Bellzone received cash injections of tens of millions of dollars from Chinese partners.

Casting a further pall on proceedings, the Ebola outbreak in Liberia, Sierra Leone and Guinea also risks further crippling their fragile economies, as the movement of goods and services seizes up.

Even for ArcelorMittal, the number-one steelmaker in the world and owner of several iron ore mines in Liberia and Guinea, current conditions pose challenges. In August, the company declared force majeure on an expansion project in Liberia due to risks from the disease.

Winners and losers

To sum it up, the picture is bleak. However, it does not spell the end for iron ore investments in Africa. There will of course be winners and losers.

The winners will likely be the big producers that can afford to sit out the tough times and wait. The losers will be the smaller producers and the African countries that hoped to make a mint and thought that the short-term gains of mining would soon be in evidence. The smaller explorers have been the worst hit so far, especially those in Central Africa.

In July, South Africa’s Anglo American and Kumba pulled out of a proposed deal to finance the Mebaga iron ore project owned by Ferrex in Gabon.

Even the ambitious Chinese firms that hoped to stake out their futures producing iron ore in Africa may be having second thoughts.

Chinese state-owned firms that piled into African mining projects in order to secure long-term supply deals are now having to share the pain.

Bankers say deals like Shandong Iron and Steel’s 2012 decision to pay $1.5bn for a 25% stake in African Minerals and the Hong Kong-based China International Fund’s 2010 agreement to fund Bellzone’s Kalia project to the tune of $2.7bn could become a thing of the past.

The trend is now turning to infrastructure investment, where giant Chinese interests, including lenders and export credit agencies, agree to help build roads and railways in exchange for mining offtake.

In a different sort of deal in the iron ore value chain, state-owned Hebei Iron and Steel Group announced it would develop a steelmaking plant in South Africa’s Limpopo Province in September.

So, what do lower prices spell for the various projects across the continent? Certainly, location, development stage and the size of the deposit matter, but issues of quality and grade will dominate.

One project stands out from all others. Simandou has come to embody all the dynamics at play in African iron ore. It is a huge deposit of unquestionable potential, which former Rio Tinto chief executive Tom Albanese described as the biggest tier-one iron ore asset in the world today.

However, building the mines and extracting the ore from Rio Tinto’s two blocks is one thing, getting it from the remote forests of south-eastern Guinea to the coast is quite another.

It requires the construction of a railway across 700km of the country’s undeveloped and mountainous interior. How much it finally ends up costing is anyone’s guess.

Rio Tinto, which has agreed to spearhead efforts to help court investors, privately expects the final bill to come in somewhere between $14bn and $20bn.

Licences revoked

Rights to the other two blocks at Simandou were acquired by Israeli businessman Beny Steinmetz’s BSG Resources under the dictatorship of the late Guinean president Lansana Conté in December 2008. President Alpha Condé’s government has fallen out with BSG and its partner Vale and revoked the rights to the blocks this year.

A tender for the licences previously owned by BSG Resources and Vale is expected to take place later this year, and Guinean officials say they have already lodged high levels of interest from some of the world’s largest mining companies.

Glencore could be one of them. Chief executive officer Ivan Glasenberg admitted that the project holds some allure, but only if its huge infrastructure issues could be sorted out, at little or no cost to the companies that mine the iron ore.

Guinea is a tough one, Glasenberg told journalists on a conference call in late August. There’s a massive capital expenditure required for the rail line and port. If Guinea does what they say they’re going to do and gets an infrastructure company to build the rail and port [. ] then we don’t have massive cost. It’s just a matter of developing the mine and utilising the rail and port at a cost, but not with a massive capital commitment up front. But there’s a long way to go.

With iron ore prices in the doldrums, mining majors may not be in any rush to see the project developed in a hurry.

Instead, the real objective may lie in gaining – and then maintaining – control of the deposit. Simandou’s value as a deposit lies not only in its size, but perhaps more significantly in the quality of its iron ore.

For the majors, projects like Simandou mean securing fresh sources of large, low-cost supply in another 20 years, when their big long-life mines are no longer profitable.

Most mining analysts agree that Simandou is one of the only undeveloped deposits in the world that can bear comparison with Australia’s Pilbara and Brazil’s Carajás, the heartlands of Rio Tinto and Vale, respectively.

According to Paul Gait, a senior analyst at Bernstein Investment Research, Simandou’s economics are such that neither Rio, nor Vale, if they were to act rationally, would see its development as value-accretive. To the extent that the incumbents can hold onto the project and avoid developing it as long as possible, it does not pose a threat to the global iron ore supply and makes strategic sense.

That strategy is not without its risks. The Senegalese government won damages of $150m from ArcelorMittal in June after the company failed to develop the Falémé mine that it had planned to develop since 2007.

The awarding of the two Simandou blocks to BSG Resources could also be seen as a symptom of the fact that Rio Tinto first won the rights to all of Simandou in 1997 and had not been quick to invest.

Nimba could be nimble

Guinea’s other major iron ore plays may not garner the same headlines as Simandou, but the two Mount Nimba projects – one run by ArcelorMittal and the other by US giant Newmont – arguably offer a more realistic snapshot of the current state of African iron ore plays.

The projects more likely to survive the market downturn are those with relatively easy routes to market, whether through the availability of pre-existing infrastructure or cross-border routes that can be quickly tailored to suit an investment.

Unlike Simandou, for which the government has mandated the construction and use of a multi-purpose railway that will open up Guinea’s remote interior, with Mount Nimba President Condé has shown more flexibility to mining companies.

As the area is close to the Liberian border, ArcelorMittal and Newmont could be granted a special right to route their exports via the Liberian port of Buchanan, using a railway operated by ArcelorMittal.

That advantage, denied to Simandou’s owners, has already been granted to London-listed junior Sable Mining, which operates a smaller project in the same district as its larger peers.

The managers of the Avima iron ore mine in the Republic of Congo hope this will be another project with flexible transport options. British Virgin Islands-headquartered Core Mining has proposed a trucking solution to allow it to produce 3m tonnes of iron ore per annum from 2015.

The trucks would pass through Booué in Gabon until a rail link could be built to Gabon’s own planned iron ore mine at Belinga. Avima has also discussed the possibility of working with Sundance to transport ore through Cameroon.

The Gabonese government kicked out its Chinese partners from Belinga in 2012 after they failed to develop the mine and associated infrastructure projects quickly enough.

Vale had expressed an interest in the Gabonese mine before the government decided to partner with the China Machinery Engineering Corporation.

And while the enthusiasm of Chinese investors for riskier iron ore ventures may begin to wane, Asia’s other fast-growing behemoth, India, appears to be picking up some of the slack.

In August Australian explorer Legend Mining announced the $17.5m sale of its Ngovayang project in southern Cameroon to Indian steelmaker Jindal Steel & Power, part of an emerging trend of Indian companies making a move into the African commodities space.

To the south of the continent, the iron ore picture becomes one of sharp contrast. On one hand, there is South Africa with its well established powerhouse producers; on the other there are ambitious upstarts like Angola waiting for fresh opportunities to come their way.

Angola’s state-owned company Ferrangol aims to start producing iron ore in the next few years but is still trying to attract investment. The country has potentially large deposits but still needs to do geological surveys to ascertain the full scale of its reserves.

Angola’s pros and cons

The country’s 27-year civil war disrupted the development of its mining industry, which started under Portuguese colonial rule. In the 1960s and 1970s the country was exporting more than 5m tonnes per year of iron ore concentrate.

One advantage the country has over its neighbour, Congo, is pre-existing infrastructure. For example, the Cassinga mine is linked to the Atlantic coast by the Moçâmedes railway. However, attracting fresh investment is going to be difficult.

For now, South Africa remains the continental iron ore heavy-weight. Anglo American’s Sishen mine in Northern Cape should be able to produce around 37m tonnes annually for another 19 years.

At a unit cash cost of around $24/tn, Sishen is one of the lowest-cost mines operating on the continent and a major profit centre for the London-listed company.

Less well known, but an established player nonetheless, the Khumani mine, lying 30km south of the town of Khatu, sends an annual 10m tonnes to the west- coast port of Saldanha Bay.

Operated by Assmang, the iron ore and ferro-alloy producer co-owned by Assore and South African billionaire Patrice Motsepe’s African Rainbow Minerals, the mine will feed steel mills for plenty of years to come.

But until global demand returns to the halcyon days of 2008, the outlook for some of the continent’s newer players will be mired in uncertainty. ●