Ring of Fire update: Cliffs is pulling out indefinitely

Cliffs has announced that it is pulling out of the Ring of Fire and has no plans to restart its activities (press release).  I think that Cliffs is making the right decision because its own investors presentation showed that its chromite project was uneconomic (with the spot prices back then).  This is very unfortunate for me because I own shares in Noront and KWG Resources.

Valuing KWG Resources

KWG’s chromite-related assets could theoretically be worth something if chromite prices rise a lot.  The economics of the Ring of Fire chromite deposits could get better if the government announces significant subsidies and/or allows all of the chromite to be processed outside of the country.  My guess is that the federal and provincial government will do this.  In any case, the biggest issue is that low chromite prices makes the economics of the chromite deposits abysmal.  The chromite assets are basically an out-of-the-money call option on higher chromite prices.  It’s worth something but I don’t think it’s worth a lot at this point.  I was hoping that Cliffs would make a dumb move and try to build its mine but this scenario looks highly unlikely now.

I don’t think that KWG’s management is very good.  Exploring the Black Horse deposit is a complete waste of money and they should not be doing it.  The deposit is so deep that it is unlikely that it will ever be economic even if the deposit is extremely large.

I will be selling my shares.

Valuing Noront

Without Cliffs building a chromite mine, Noront’s flagship deposit might be economic if nickel prices rise to around $9/lb (this is just my guess).  Current spot prices for nickel are around $6.06/lb.  A few years ago nickel prices had highs above $12/lb.  There is some option value here.  With the shared infrastructure from a chromite mine, the economics for Noront’s deposit would get significantly better.

I will be selling my shares… hopefully at a good price.

Bottom line

I took a gamble.  Maybe I should not have taken it in the first place.  At this point it looks highly unlikely that it will pay off.  I’m pretty sure the correct decision now is to sell.

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