Baffinland conundrum: moving ore by road or rail

TORONTO (Reuters) - Trucking iron ore from Baffinland’s Arctic mine instead of moving it by rail would cost much less at first, but the over-the-road option would slash output and cause operating costs to balloon.

According to a feasibility study released late Thursday, trucking ore from the huge Mary River mine to a coastal port would cost about C$740 million ($744.7 million) compared with C$4 billion to use a railway system.

On Friday, two rival bidders for Baffinland - ArcelorMittal and Nunavut Iron Ore - joined forces to offer C$1.50 a share, or C$590 million ($595 million) for the explorer. Baffinland shares, trading at C$1.53 on Friday, had nearly tripled during their four-month takeover battle.

Neither ArcelorMittal nor Nunavut has said which option, road or rail, it prefers.

According to a 2008 feasibility study, the company could ship 18 million tons of iron ore annually using the rail option. With trucking, annual shipments would drop to just 3 million tons.

The new study, which indicates resources of 549 million tons at three of the nine Mary River deposits, invalidates estimates in the 2008 study, the company said. It is updating the rail study and resource estimates.

Still analysts saw the smaller initial cost of the trucking option as a positive.

“You can start a smaller operation at first, prove that you can produce the product, then ultimately you can upscale from there,” said Haywood Securities iron ore analyst Geordie Mark.

Operating costs would be higher with trucks, at a minimum of C$28.93 a ton. But it could cost as much as C$62.71 a ton to operate, not including sea transport.

The operating cost with the rail option is pegged at C$14.62 per ton, not including sea transport.

Baffinland previously dismissed trucking as too expensive, but the economics of the project have since changed.

“When we first looked at it a three years ago, it was just on a preliminary basis,” said Baffinland Vice-Chair Daniella Dimitrov. “And that was when iron ore prices were about half where they are today.”

Iron ore, delivered to China at a grade of 62 percent, is currently selling for about $175 a ton, just short of a record of $187.25 a ton and well above a 10-year low under $60 a ton.

Because the grade at the Baffinland mine is high, averaging around 66 percent, it requires no chemical processing before shipping and would command an even higher sale price.

No matter what option is chosen, Mary River will be developed as an open pit mine, with a two-stage crushing and screening plant to make the lump ore product for shipping.

Additional reporting by Pav Jordan; Editing by Frank McGurty