PDAC-Asian cash drives Canadian iron ore project spurt

Mon Mar 5, 2012 8:57am EST

* Asian end-users step in to fill funding gap

* Explorers signing joint-ventures, supply agreements

* Turbulent stock markets make equity offerings difficult

* European banks retreated from financing, leaving gap

By Pav Jordan

TORONTO, March 5 (Reuters) - When Adriana Resources needed to develop its Lac Otelnuk iron ore project in Eastern Canada, it turned to Chinese steelmaker WISCO to help foot a bill that will eventually come to some C$12.9 billion.

WISCO, a subsidiary of global steel giant Wuhan Iron & Steel Corp, was among the few prospective partners with deep enough pockets to consider the price tag on the project to build what promises to be one of the world's largest iron ore mines.

"Logically, the only way that made any sense was to go to an end-user as a partner, because they could absorb the slightly higher capital and because by the time it comes out in the wash they are getting their material at a huge discount," Adriana Resources Chief Executive Allen Palmiere said of the investment.

"It's impossible to access capital markets for that kind of funding, it just can't be done," said Palmiere, who approached WISCO in 2009, when he was barely a month into the job.

Joint ventures like the one signed by Adriana Resources and WISCO are becoming increasingly common in Canada, marrying cash-strapped explorers and Asian partners that need bulk commodities like iron ore to feed rapid industrialization. The concept is set to be a theme at the Prospectors and Developers Association of Canada (PDAC) convention in Toronto this week.

Among the nearly 30,000 delegates at this week's PDAC event are executives from exploration companies eager to sign so-called take-off agreements, where they receive project financing in exchange for equity stakes or promises of future production.

Under the deal with Adriana, WISCO became the 60-percent owner of the Lac Otelnuk project, which is due to start producing some 50 million tonnes of iron ore pellets per year in northern Quebec in 2016 or 2017.

WISCO, which has already committed C$120 million to the project, will also own the right to 60 percent of production, guaranteeing supply for its steel mills for some 50 years.

"You've seen a lot more of these kinds of partnerships as a way for explorers to fund their business instead of relying on the public markets," said a investment banker at one of Canada's largest lenders.

"Where some have used public markets, many others are moving to the strategic capital and to the trading houses of Japan, with the Chinese investors and other money out of Asia."

Both China, the most powerful force in the world economy since the 2008-09 economic crisis, and India have helped sustain commodity prices even as the weak U.S. housing market and Europe's sovereign debt crisis stymie regional growth.

Asian commodity giants have also become major project financiers as turbulent stock markets made it tough to do equity offerings. The deals are also gaining popularity as European banks retreat from strategic funding deals, bankers say.

There are few statistics to quantify growing participation by Asian powers in Canadian resources. But numerous individual examples highlight the level of Asian interest.

Another example is Century Iron Mines, Canada's largest holder of iron ore land claims, which has a joint venture agreement that gives WISCO access to 40 percent of output from three projects in the Quebec/Labrador area and a 25 percent stake in Century.

New Millennium has partnered with Indian steel giant Tata Steel to develop two projects in the same region.

Palmiere said at least three other Canadian miners in the iron ore-rich Labrador Trough in northern Quebec - home to about a dozen other early stage exploration projects - are seeking deals with Asian partners.

"I get a sense there's more and more activity of Chinese looking to Canada as sort of an acquisition point," said Michael Bourassa, a mining lawyer with Fasken Martineau DuMoulin who represented Adriana on the WISCO deal.

"There is definitely an appetite out there from people looking in Canada. They use us as sort of a stepping stone to get to the assets, because a lot them are held by juniors and intermediates here in Canada."