• Market for DR grade 65% plus iron ore could rise fivefold to 750Mtpa according to new research from Wood Mackenzie
  • As much as US$1.4 trillion needs to be spent on new mines, renewable energy, steel mills, hydrogen and carbon capture to reduce carbon emissions from steel making by 90% in a net zero world
  • We present a handful of stocks making high grade iron ore the centre of their business

Global requirements for high grade iron ore will explode to five times the current market by 2050 if the steel industry is serious about taking the US$1.4 trillion ($2.07 trillion) bet needed for a world where global warming is capped at 1.5C above pre-industrial levels.

Analysts at Wood Mackenzie say a major shift in the way steel is produced under an ambitious 1.5C energy transition scenario, reducing emissions from the notoriously polluting sector by 90%, will spark a major uptick in demand for “DR grade iron ore”.

A new report called Pedal to the Metal has outlined the ambitious steps the industry, responsible for around 7% of global CO2 emissions, must take to meet Paris aligned net zero by 2050 targets.

This would require a global shift from the dominant blast furnace/basic oxygen furnace route of steelmaking towards electric arc furnace and hydrogen powered direct reduced iron route for steel and iron production respectively.

Only high grades of iron ore with low impurities in the form of “DR (direct reduced) grade” pellets can be used in that crucial process.

The current market for this type of iron ore is around 100-125Mtpa. It will need to grow between 5-5.5x to a barely fathomable 750Mtpa (around half of the total seaborne market currently) by 2050 in a 1.5C scenario.

Benchmark 62% Fe iron ore prices have been volatile in 2022, dropping from highs of around US$163/t in March to a touch under US$100/t currently due to China’s debt-riddled property market and Covid lockdowns.

DR grade pellets however have enjoyed strong premiums, in part due to Ukraine and Russia making up around 30% of the market.

WoodMac says the shift to greener steel will provide support for already strong premiums for high grade iron ore in the decades to come.

“DR pellet premiums (over BF pellet) gained momentum in the second half of this year and shall end the year at US$7-8/t,” WoodMac head of steel and raw material markets Malan Wu told Stockhead via email.

“In our base case (2.3-2.4 degree warming scenario) we expect this premium to widen to US$15-17/t in the long term as demand for green feedstock rises.

“The price gain would be even higher under an AET 1.5, where we see demand for DR pellets to quintuple by 2050 (over current levels).”


The numbers are staggering …

Incredibly, a growing, urbanising world and the rollout of renewable energy linked to the energy transition will mean the notoriously hard to abate industry will need to eliminate carbon emissions while seeing steel demand increase by 15% to 2.2Btpa.

WoodMac says US$150-200 billion needs to be spent on developing iron ore mines, 63% on new high grade mines and 37% on existing operations.

The pool of scrap steel will need to double to 1.3Bt, 52Mt of yet to be commercialised green hydrogen will be required, 2000GW of renewable energy (equivalent to two-thirds of current global capacity) and 400-500Mt of carbon capture and storage will need to be installed.

US$100b will need to be spent on DR pelletisation, US$350-400b on iron reduction, 44% on developing an H2 ecosystem and 56% on DRI furnaces, US$450-500b on the world’s steelmaking fleet, 54% of it retrofitting basic oxygen furnaces, 34% on EAF capacity and 12% on another technology called molten oxide electrolysis, and US$200-250b on CCUS.

Wu said in an interview we are currently way behind the pace when it comes to meeting these ambitious requirements.

“I think this is a very urgent task, we must tackle it and be willing to put the investment in,” she said.

“I think it’s possible, but how are we going currently I think we’re definitely way behind where the speed needs to be at.

“We need at least 350 million tons of new high grade ore (over and above current planned supply).

“So that means the miners need to invest about US$250-300 billion, including creating zero carbon mines to combat their scope one and two emissions, developing high grade mines and setting up the pellet plants to feed growing steel.”


Green premiums

Green premiums of two different kinds are expected to emerge.

Along with the increased demand and likely uptick in prices for higher grades of iron ore, an additional US$100/t is expected on steel prices, increasing costs by around 15-20%.

That will come from higher prices for raw materials, as well as carbon taxes and offsets.

As mentioned before, WoodMac expects premiums for DR grade pellets, while a carbon price of around US$5/t is expected over its long term 62% Fe iron ore price of US$80/t.

Challenges to the transition are expected to come from a variety of sources.

The dearth of high grade developments in the global pipeline is one, as is the task of reducing the cost of producing green hydrogen to US$2/kg, the key enabler of green direct reduced iron.

Also of concern is the relatively young life of the blast furnace fleets in China, the world’s largest steel producer with a global market share of almost 60%, and India, widely expected to be the world’s growth market for the commodity.

“India is one of the regions in our analysis actually where we see their carbon emissions are going to increase because India is a growing economy, their steel consumption will increase over time,” Wu said.

“And they are well positioned to stick to the conventional blast furnace route of steelmaking because they have domestic iron ore deposits and are very close to the met coal seaborne markets.

“And also they currently have a number of blast furnace capacity expansion projects already in the pipeline.”

These could have a shelf life of 40-50 years, one of the reasons BHP remains bullish about the outlook for metallurgical coal demand from blast furnace steelmaking for decades to come.

Wu said one way of reducing steel emissions would be by using hydrogen to replace pulverised coal for injection in the blast furnace, noting India has the ambition of producing green hydrogen also on a massive commercial scale.

She describes China on the other hand as “the elephant in the room”.

“China’s carbon emissions naturally are going to decline because its demand and production is declining and (economy) is maturing and that by itself will reduce about 50% of the current carbon emissions,” Wu said.

“But that is not enough for China to get to net zero, the industry must reduce this carbon emissions by more than 90%.

“China’s blast furnaces still have a long way to go.

“I think they have at least another 15-20 years to go in a lot of their blast furnaces. So that will go down to how serious the government is in terms of decarbonising the steel industry and how much government support will be lent to the industry.”


Who has the iron ore to make the grade?

All in all, Wu says, iron ore miners have made big commitments to reduce scope 1 and 2 commissions, such as switching trains and trucks to electric and hydrogen power from diesel, and using natural gas rather than shipping fuel in marine fleets to create green corridors.

But a large amount of investment and willpower will be needed to meet the demands of a net zero world, with the majority of emissions at the steelmaking end where solutions are further away.

Mining giants are still comfortable investing billions in lower grade sources of iron ore, either to open new mining fronts or sustain their vast operations in the Pilbara. The market, for now, remains intact.

They are still being bankrolled by China, with the world’s largest steelmaker Baowu investing over $1 billion to support the construction of Mineral Resources’ (ASX:MIN) 35Mtpa Onslow iron ore project alongside a consortium of international companies and Rio Tinto’s (ASX:RIO) 25Mtpa Western Range replacement mine at its Paraburdoo hub.

Onslow, ~60% owned by MinRes, part of the APIJV and once viewed as the sleeping giant of the Pilbara iron ore industry, is a particularly interesting development for this day and age.

While its product will be price linked to the discount 58% index (still heavily supplied by Aussie miners, notably Fortescue Metals Group (ASX:FMG)), there remains a market for that kind of ore from China’s blast furnaces. MinRes claims at just $32/t FOB, costs will be low enough to deliver thick margins across the cycle.

Some analysts believe Australia’s major iron ore producers have fallen asleep at the wheel, with our industry at a disadvantage to producers in Brazil, the Americas and Africa.

But top tier iron ore miners are beginning to recognise the importance of grabbing a share of the high grade market.

Fortescue plans to open its 22Mtpa Iron Bridge magnetite mine in the coming year. Fraught with delays and cost overruns, green hydrogen promoting FMG thinks the premiums for its 68% concentrate will make the venture worthwhile.

MinRes is considering turning its high cost Yilgarn iron ore hub into a magnetite playground, while Gina Rinehart and her Hancock Prospecting has revived studies on a magnetite project in the Pilbara and taken the lead in a JV to study a marooned magnetite project with juniors Legacy Iron Ore and Hawthorn Resources.

BHP tried unsuccessfully years ago to beneficiate its 62% Fe Pilbara hematite into a premium product.

But Rio Tinto and BHP are, incidentally, still two of the largest high grade producers on the ASX, though only for their non-core Iron Ore Company of Canada and Samarco (a JV with Vale in Brazil) operations, respectively.

Privately owned operations also abound, including CITIC’s Sino Iron’s project and Gindalbie Metals’ Karara Iron Ore Mine in WA, and SIMEC Mining in South Australia, owned by Sanjeev Gupta’s GFG Alliance and part of the supply chain for the Whyalla Steelworks, where the company is looking to use its own ore to develop a green steel pathway.

Looking for exposure to pure play high grade producers on the ASX? Here are a handful with their eyes on the prize.

Note: For this list we’re only considering companies looking at producing magnetite pellets or concentrate, not high grade DSO like Rio’s Simandou or Mt Gibson’s Koolan Island.


Champion Iron (ASX:CIA)

Champion Iron is the largest high grade specialist on the ASX, producing 7.5Mtpa of 66.2% and 67.5% plus DRI quality iron ore concentrate from its Bloom Lake complex in Quebec, Canada.

Its origin story was an incredible counter-cyclical move from Champion and its Australian figurehead Michael O’Keefe, renowned for being part of the Riversdale Mining team that made a motsa selling the ill-fated Mozambique coal assets to Rio Tinto.

Champion bought Bloom Lake, which runs off renewable hydroelectric power, for just $10.5 million off Cliffs in 2016 at the height of the mining bust when iron ore prices were in the toilet.

It is now a $2.7 billion company, up around 2500% in the six years since signing off on the Bloom Lake deal.

The company says its 66.2% concentrate reduces emissions in the blast furnace steelmaking process, while its >67.5% pellet feed concentrate can be used in electric arc furnaces which normally require scrap steel as a feed source, 50% less emissions intense than blast furnaces.

Champion Iron has built on its success to fund its Bloom Lake II development, ramping up production to 15Mtpa, shipping its first product from the expansion in May and exporting a record 2.28Mt in the first quarter of FY23.

It is conducting research on producing a 69% super premium pellet iron ore product. The company has growth options as well at projects along the Labrador Trough.


Champion Iron share price today:


Grange Resources (ASX:GRR)

A clear leader in the listed Australian high grade space, Grange owns the Savage River mine in Tasmania from where iron ore has been produced for more than 55 years.

Largely owned by Chinese investors, Grange is small in stature but big in profitability, recording a $132.2m profit in the first half of 2022 despite iron ore prices falling well below 2021’s first half records.

The premium offered for Grange’s pellets when prices are flying is beyond ridiculous.

In the June quarter of 2021, when iron ore reach its zenith, Grange ore was selling for US$287.15/t, generating a margin of almost AUD$300 on every tonne of iron ore shipped.

Since then prices have come off substantially and energy costs have pushed its opex higher to $193.44/t and $122.72/t respectively. Those are still very strong margins for a junior, with $369.47m cash and $8.52m of trade receivables sitting in Grange’s bank account as of June 30.

The now ASX 300 firm is sitting on plenty of cash and delivering regular dividends to shareholders, including a 10c per share special divvie at Christmas last year and 2c interim dividend in August.

Grange is looking at going harder for longer at Savage River, completing a PFS in December that showed it could up “green pellet production” threefold from ~2Mtpa to ~6Mtpa over 10 years by switching from open pit to underground caving methods.

Grange has a second growth option at the 5Mtpa Southdown magnetite project near Albany in WA’s Great Southern region, where a PFS is being undertaken.

A decade-old study placed a prohibitive US$2.9 billion price tag on a larger 10Mtpa Southdown development.


Grange Resources share price today:


Magnetite Mines (ASX:MGT)

Few companies are as passionate about the potential of high grade iron ore and low carbon steel making as Magnetite Mines.

Chairman Mark Eames, an iron ore executive whose career has included stints at BHP, Rio, Glencore and X-Strata, even wrote a company white paper last year about the industry’s transformation.

A pre-feasibility study on its Razorback iron ore mine in South Australia last year placed a price tag of up to $675 million for its go forward case, involving the production of 3Mtpa of 68% iron ore concentrate a year over a 23-year mine life.

That capex estimate is three times less than the number produced by the previous management of the company.

One of those costs savings could be a potential ESG boon for the junior iron ore hopeful, which wants to leverage the work the South Australian Government has done to shift most of its grid electricity supply to wind power.

By connecting to the grid through a transmission line MGT expects to save considerable money it would otherwise have spent on a standalone power plant and capture an ESG premium by using renewable energy to power its processing operations.

But it is going further, with new CEO Tim Dobson last week announcing the company would look to increase its starting scale to 5Mtpa in response to growing demand for high grade iron ore, only set to increase over the project’s more than two decade-long life.

“In raising its sights, the company is responding to direct evidence of rapidly-evolving market conditions associated with the decarbonisation requirements of the iron and steelmaking industry. The company has anticipated this shift and has strengthened its team accordingly,” Eames said.

“The current Razorback Ore Reserve represents only 11% of the company’s Mineral Resources, so this strategic shift to a larger initial production scale better aligns the project with the resource potential, while still taking advantage of the abundant existing infrastructure that will support a pragmatic, staged development agenda.

“The company is committed to returning the highest possible value to shareholders, and this strategic shift is fully aligned with that objective.”


Magnetite Mines share price today:


Magnum Mining and Exploration (ASX:MGU)

Another ASX-listed but overseas focused stock, Magnum Mining and Exploration owns the Buena Vista Iron Ore project in Nevada over in the USA.

Magnum’s plan is to go beyond just mining iron ore to selling “green” hot briquetted iron and pig iron products to customers in the States and Asia.

The company has had an agreement to negotiate on offtake with Anglo American in place since mid-2021, but late last year extended the time to complete the deal to November 30, 2022, amid the changing scope of the Buena Vista project from a magnetite concentrate mine to a “green iron” development.


Magnum Mining share price today


Iron Road (ASX:IRD)

Iron Road owns the Central Eyre Iron Project near Warramboo in South Australia.

Recently it has been one of the proponents of a new “green” export facility at Cape Hardy in region SA, but news about the project underpinning those plans has been relatively scant.

An “optimisation” study back in 2015 placed a US$4.6 billion overall cost (including a $570m pre-strip) on developing a 24Mtpa mine producing a 67% concentrate with low impurities, a capital investment even BHP and Rio would struggle to find the money for at that sort of production rate.

In 2017 that was cut to $US3.7b and then US$1.74b in 2019 by reducing its targeted production rate to 12Mtpa, replacing rail with road trains and a reduction in power requirements.

South Australia has a rich history of magnetite iron ore production, with Whyalla Steelworks owner GFG Alliance running the Simec Mining Middleback Ranges mine site around 60km from the steel town.

Most of the 1.3Mtpa of high grade pellets are supplied to the Whyalla Steelworks, with around 10Mtpa of hematite ore shipped to Asian customers.


Iron Road share price today


Hawsons Iron (ASX:HIO)

Formerly known as Carpentaria Resources, Hawsons owns the deposit of the same name near the historic mining town of Broken Hill in New South Wales, birthplace of BHP.

Hawsons boasts a maiden probable reserve 755Mt at 14.7% Davis Tube Recovery grade it says could be upgraded to 111Mt of “Supergrade” 70% magnetite concentrate, which it is marketing as a “green steel” product.

A PFS was released in 2017 estimating it would cost US$1.4 billion to deliver a project shipping 10Mtpa at an all-in FOB cost of US$48.03/dmt. But Hawsons is now looking into the possibility of expanding that scale to 20Mtpa on account of demand for greener iron ore products.

Whether that will be achievable remains to be seen, with a BFS on the way. The company this year upgraded its measured, indicated and inferred resource base from 400Mt of ore including 3.06Bt at DTR 13.1% to 484Mt including 3.95Bt at DTR 12.2%.

Hawsons is one of the few iron ore companies to enjoy a share price run in 2022, up 167.65% YTD.


Hawsons Iron share price today


Strike Resources (ASX:SRK)

Strike’s opened the new Paulsens East mine in the Pilbara earlier this year.

Boasting a 9.6Mt resource at a decent grade of 61.1% iron and a 1.5Mtpa run rate consisting of a 75-25 split of 62% lump and 59% fines, Paulsens East is pretty standard fare for a local iron ore junior.

The company announced its maiden shipment in August but is reviewing the project in light of a slowdown in 62% Fe iron ore prices, which have fallen from ~US$160/t in March to ~US$100/t today.

Strike’s big high grade gambit is in Peru at its Apurimac operations, where it last year began exporting small quantities of ~65% DSO product, making its first shipment in August 2021.

Negotiations are currently ongoing with a South American steel mill on another shipment, but Strike will need working capital to fund production.

The larger magnetite resource at Apurimac contains 269Mt of iron ore at 57.3%, which according to studies dating back to 2010, could produce ~20Mtpa of 66% concentrate at a build cost of US$2.6-2.9b and opex of US$17-20/t.

Given the age of that study, Strike, which last year spun out its lithium and graphite assets into float Lithium Energy (ASX:LEL), is weighing up options on the next stage of works and studies after a review by Ausenco last year.

One area where it expects to make a saving is via the construction of the US$4.6 billion, 577km long Andahuaylas Railway by the Peruvian Government which would connect the mine to port, now expected to start as early as 2023.


Strike Resources share price today:


Other companies with high grade projects on their books (alongside hematite DSO resources in many cases) include African focused Akora Resources (ASX:AKO) and WA-based Juno Minerals (ASX:JNO) and Macarthur Minerals (ASX:MIO), while Arrow Minerals (ASX:AMD) recently picked up the Simandou North project in Guinea, exploring for +65% hematite similar in nature to the proposed 200Mtpa Simandou mine to the south.

At Stockhead, we tell it like it is. While Magnetite Mines and Arrow Minerals are Stockhead advertisers, they did not sponsor this article.