Big discounts for lower grade iron ore are here to stay says explorer Flinders Mines, which is searching for a way to upgrade the product at its Pilbara Iron Ore Project (PIOP) in Western Australia.

Lower grade iron ore was discounted by up to 40 per cent last year as Chinese steelmakers increasingly favoured higher quality feedstocks (above 62 per cent iron) to boost mill productivity and meet more stringent pollution control measures.

Widening market discounts and penalties associated with lower than 62 per cent iron ore product  — as well as high alumina and silica impurities – “appear to be of a structural nature”, said Pilbara-based Flinders (ASX:FMS).

“It is the view of the company that such discounts and penalties could have a material effect on the pricing of the probable PIOP iron product,” it told investors Friday.

“Due to this concern the Company has started work on the options to upgrade the potential PIOP product grade and to add to the existing JORC resources available for mining.”

JORC refers to the mining industry’s code for reporting exploration results, mineral resources and ore reserves, managed by the Australasian Joint Ore Reserves Committee.

This work will continue during the December 2018 quarter.

The Flinders Mines (ASX:FMS) share price over the past year.
The Flinders Mines (ASX:FMS) share price over the past year.

Completing this work will incur “significant costs, and its progress in 2019 will be subject to the availability of funding, the company said.

The PIOP – near Tom Price in Western Australia’s iron ore-rich Pilbara region —  currently hosts a mineral resource of 1042 million tonnes of iron ore grading 55.6 per cent iron.

The company’s share price – which has traded between 5.8c and 11c over the past year — was down almost 4 per cent to 7.8c on Monday.

Flinders had about $5 million in cash and no debt at the end of September.

Iron ore markets are booming

On Friday, iron ore spot prices closed at their highest level since early March, Business Insider Australia reported.

According to Metal Bulletin, the price for benchmark 62 per cent rose to $US76.48 a tonne; but lower grade ore also pushed higher during the session.

All grades are now up more than 20 per cent from their year-to-date lows, leaving them in a technical bull market.