Labrador Iron Mines Holdings - after a near death experience
Should this microcap be renamed Lazarus if it recovers?
A few years ago I was unfortunate enough to hold approximately 1 million share of Labrador Iron Mines Holdings (LBRMF) often referred to as LIM, which were at one point trading at CAD$17 per share. A short period of production with clumsy management of both mining and shipping and a collapse of iron ore prices and this company verged on insolvency and underwent a restructuring under the Companies Creditors Arrangement Act (CCAA), emerging debt free but with a reduced interest in its iron ore deposits, keeping only a ~50% stake.
The company dropped its TMX listing (no doubt to reduce costs) and kept trading on the OTC pink sheets. Through a couple of transactions, my stake was reduced to 666,667 shares which I own today. They trade on the pink sheets at about US$0.10 per share.
But things are looking up a bit (could they look down any further than near bankruptcy) as the company raised a small amount of cash (US$4 million) and attracted a strategic partner - Scully Royalty Ltd. LIM has a market capitalization of about US$20 million and just enough working capital to keep afloat. But LIM also has a few million tons of iron ore, both direct shipping ore (DSO) and lower grade but mineable taconite containing about 32% iron ore. The DSO resource is enough to keep a small 2 million tonne per year operaton going for 5 to 10 years.
The taconite deposits are larger. The company’s web site discloses the size of those deposits as follows with respect to the taconite: “LIM also holds the Elizabeth Taconite Project, which has its first independent Inferred mineral resource estimate, as at June 15, 2013,comprising two adjacent deposit areas. Approximately 620 million inferred tonnes at an average grade of 31.8% Fe have been estimated in Elizabeth No. 1 and a potential 350 million to 600 million tonnes at an average grade 31.9% Fe have been estimated in Elizabeth No. 2.”
Iron ore prices are volatile and at the current price of ~US$95 LIM’s deposits would be marginally profitable and very high risk, and with the prospect of a recession clearly in sight and China the key customer, there is not much chance LIM will restart production in the near term.
At last summer’s price of over US$150 per tonne, LIM’s plan to ship 2 million tons per year when back in operation would likely generate somewhere around CAN$130 to $150 million in cash flow per year and the company estimates the costs to restart production are less than CAD$50 million.
It is a faint hope that the coming recession will be short and we avoid a prolonger period of stagflation, although Biden and Trudeau policies are so out of touch with reality that they may well engineer a bad outcome. In a few year’s time, the world will return to normal (it always does) and LIM could have its moment in the sun.
At US$0.10 a share, I like my holding and will keep it. If the company does achieve annual cash flow of CAD$130 million it will have a potential market value somewhere around CAD$500 million and LIM’s 50% interest would see its shares trade in the CAD$1.50 per share range. I am fine with a speculative bet that has a 15 to 1 potential gain notwithstanding a risk of total loss. If the taconite deposits ever reached a production stage, the potential gain would be higher yet. For several years, I have expected a total loss and it is too early to change that expectation.
I currently own too much steel & iron ore stocks (CLF, SID, VALE, PKX, X, also RIO & BHP).
I got caught out by just how quickly the market turned earlier this year.
Cliffs is my largest position by far, which has gone through major changes over the last two years & is now a fully integrated steel producer - specialising in auto steel.
We have just come out of two years of lockdown & major market suppression + supply shortages (e.g. chips). Vehicles will still have to be replaced as their lifespan expires. My hope is, that this is still a setup for a major rally in consumption - albeit for a limited period. (If we end up in a depression, then obviously this won't be the case)
I own VALE, because it offers exposure to China, free from Australian politics & potential beneficiary of any disputes between the two. VALE is primarily an iron ore producer, but it is also the world's largest producer of nickel (essential for batteries & stainless). VALE is shareholder friendly & distributes free cash to them.
China intends to produce more iron ore of its own, but it will NEVER completely replace the vast quantities it has to import (particularly from Australia). This is important and demonstrates the leverage that Australia could be called upon to use in event of future conflicts / disputes with China. (Depending on whether their political class completely sell-out to China - the recent election result was not good).