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Three weeks ago, Lourenco Goncalves warned that shutting down the Bloom Lake mine in Quebec would not be a simple task. “Going away from [Bloom Lake] is not deleting it on a computer. It’s a pretty complicated process,” the chief executive of Cliffs Natural Resources Inc. told the Financial Post.
He wasn’t kidding. Cliffs announced on Wednesday that it plans to exit Bloom Lake. And if it can’t find a buyer, it expects to be on the hook for astounding closure costs of US$650-million to US$700-million during the next five years. The stock plunged US$2.04 or 20% to US$8.17 in New York on the news.
The Cleveland-based miner did not respond to requests for comment. But analysts said a key problem for Cliffs is the penalty costs involved in breaking a “take or pay” rail contract between Bloom Lake and the Quebec North Shore and Labrador Railway Company. If the mine shuts, there is no choice but to terminate that contract.
Citigroup analyst Brian Yu was forecasting US$360-million of care and maintenance and transport penalty costs over three years to close Bloom Lake, noting the company’s estimate is “obviously much larger.”
Cliffs said in a filing this month that if Bloom Lake were to close, “various commitments including rail minimums, royalties, and other ongoing costs could be incurred.”
As high as Bloom Lake’s closure costs are, they are not unprecedented. Jack Caldwell, a geotechnical engineer at Robertson GeoConsultants Inc., noted the closure cost of the proposed KSM mine in British Columbia is $1-billion.
As high as Bloom “[Bloom Lake] is within the range of reason, put it that way,” he said.
Closing the mine is not Cliffs’ first choice of options. Bloom Lake is unprofitable at current iron ore prices, and needs a US$1.2-billion investment in order to boost production and get costs down. Mr. Goncalves was trying to find partners to share the cost of the expansion, but pulled the plug on that plan when he could not reach a deal in a reasonable timeframe.
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