Baffinland plans further expansion at Nunavut’s Mary River: report

Moody’s report says plans would see up to 18 million tonnes shipped through Milne Inlet

A haul truck carries iron ore along a road between Mary River and Milne Inlet on north Baffin Island. Baffinland Iron Mines Corp. appears to be considering a further expansion that would see the production of up to 18 million tonnes of ore per year. (Baffinland handout)

By Jim Bell

Baffinland Iron Mines Corp. is likely planning a further expansion of its Mary River iron mine that would see iron ore shipments through its Milne Inlet port increase to 18 million tonnes a year.

That information is contained in a credit report on Baffinland, prepared by Moody’s Investors Service, dated June 2020 and obtained by Nunatsiaq News.

“Baffinland plans to expand the Mary River mine to a capacity of 18 Mtpa [18 million metric tons, or tonnes],” says the report, which repeatedly refers to a “Phase 3” expansion.

That’s a larger production figure than that provided to stakeholders and regulators by Baffinland in its current “Phase 2” proposal, which the Nunavut Impact Review Board is still assessing, that is, 12 million tonnes a year.

When Nunatsiaq News asked if the company does indeed plan a further production expansion, Baffinland did not explicitly deny or confirm the Moody’s report.

But the company said that for now, it wants the NIRB to assess its expansion plans only on the basis of its 12-millon-tonne proposal—but left the door open for more expansion activities in the future.

“Today, we are seeking approval for our proposed Phase 2 expansion and ask NIRB and all Intervenors to hold us accountable to the current project being evaluated,” Heather Smiles, Baffinland’s manager of stakeholder relations, wrote in an emailed statement.

“Any expansion activities not covered by Phase 2 will follow regulatory requirements and engagement expectations.”

Last year, a similar suggestion emerged from a leaked Baffinland document, intended for potential investors, that also contained information suggesting the company wants an expansion of up to 18 million tonnes a year along the northbound Milne Inlet railway.

That prompted the Oceans North conservation group to put a motion before the NIRB, at its public hearing in October 2019, alleging Baffinland failed to disclose the full scale and impact of its expansion project.

Baffinland denied those allegations, and said it wants the NIRB to evaluate its proposal only on the basis of 12 million tonnes per year. NIRB dismissed the motion.

We’re still committed to Steensby Inlet, company says

The report by Moody’s barely mentions Baffinland’s plan for its southbound Steensby Inlet rail and port system, which is fully permitted.

Under that plan, which the NIRB approved in 2012, Baffinland has regulatory permission to build a 143-kilometre railway to Steensby Inlet and ship up to 18 million tonnes per year through Foxe Basin and Hudson Strait.

But they have yet to develop the Steensby Inlet route. In January 2013, Baffinland changed course, postponed construction of the Steensby Inlet railway, and opted instead for a trucked route northwards to its port at Milne Inlet.

The company says, however, that the southbound route is still on the table.

“We remain committed to the construction and operation of the Steensby project as soon as feasible. In the meantime, we will continue to pursue the responsible development and expansion of the northbound Milne Inlet route,” Smiles said in the Baffinland statement.

Many risk factors

Moody’s Investors Service examines companies in detail and assigns credit ratings to them based on the consideration of multiple factors.

Potential investors then use that credit rating to decide if it’s safe to lend money to the company and to figure out what interest rate they should charge.

The highest long-term rating a company can receive is “Aaa.” For Baffinland, Moody’s assigned a much lower rating of “Caa1,” in the “not prime” category.

Baffinland’s largest shareholder is Nunavut Iron Ore Inc., which is controlled by a Texas-based private equity firm called the Energy & Minerals Group, which owns 72 per cent of the company. The European steel giant ArcelorMittal owns the other 28 per cent.

In their analysis of Baffinland, Moody’s describes the mine as a “small-scale” operation and, at its current production level of six million tonnes per year, one of the smallest mines the company has looked at.

Moody’s listed multiple risk factors for the expansion of Mary River, most of which are well known to the public:

• Its only source of revenue is a single commodity, iron ore, which is subject to volatile pricing, from only one mine, located in a remote location, producing only six million tonnes per year right now.

• The risk of regulatory delays, such as the length of time it took for the Nunavut Planning Commission to issue a land-use conformity decision.

• A short shipping season that starts each year in late May or early June and ends in late September or early October each year.

“With the company relying on the single mine for all cash flows, disruptions in production from geological difficulties or external factors such as weather could have a significant negative impact on the company’s financial performance,” Moody’s said.

The report also said the company needs a capital budget of between $1.2 billion and $1.3 billion to complete its expansion.

That means in the short term, the company would likely have to wait years before getting a payback on that investment.

“With this large spend program, Baffinland will have significant negative free cash flow over the next few years,” the report said.

Expansion would cut costs in half

On the other hand, after the expansion was completed, the company’s production costs would be cut in half.

Right now, at about six million tonnes per year, it costs the company between $38 and $40 to produce a single tonne of iron ore.

But after the expansion, that cost would drop to about $20 per tonne—and the company would become globally competitive, Moody’s said.

On the upside, Moody’s lists the following advantages:

• A high-grade ore body.

• Simple mining operations.

• Its location in Nunavut, described as a “politically stable” region.

Moody’s also said that, prior to the pandemic, Baffinland’s Inuit employment levels were rising.

As of the first quarter of 2020—Jan. 1 to March 31—355 Inuit worked for Baffinland or its direct contractors. Of those individuals, 208 worked directly for Baffinland.

That’s up from the same period in 2019, when a total of 314 Inuit employees worked at Baffinland, including 169 who worked directly for the company.

But after the COVID-19 pandemic started, the company demobilized about 200 employees and contractors, representing all of its Inuit workforce and high-risk employees.

Those measures cost the company about $1.6 million, but that figure does not reflect the impact of lower production caused by COVID-19.

Overall, Mary River produced 5.7 million tonnes of ore and received revenues of $507 million in 2019, Moody’s said. But the agency did not disclose whether the Mary River mine lost or made money that year.

An earlier version of this story incorrectly named and identified the job title of Heather Smiles, Baffinland’s manager of stakeholder relations.

Moodys Credit Report Update... by NunatsiaqNews

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(9) Comments:

  1. Posted by northbaffin on

    if any of you don’t recall, they want the original 23M tons a year, in their first project description, waaay back in 2005-06. this 18M number is just a play to get it up to 23.
    they just over 6 now, they want 12, they going for 18, so quit cutting the cheese and step up and just go for the bottom line.. quit dragging this on.

    does no one remember the early years? same old square dance, different people.

    • Posted by North on

      23M is not possible from Milne Inlet.
      The 18M project is a long term goal.and has not been proven to be feasible either.

      From the 12 my guess is the steensby project where they can almost year round.

      Who know with the way global warming is going there may not be much ice left in the coming decades and the northwest passage will likely be open year round

      • Posted by northbaffin on

        its VERY possible with a railway and shipping 12 months of the year, re-read my first comment, doesn’t anyone remember the early years??

        • Posted by More than meets the eye on

          If the mine was permitted for the first phase for 18 million metric tonnes south via Steensby, and the early revenue phase was 6 million metric tonnes north via Milne (now proposed to be 12 million metric tonnes north via rail) that makes 30 million metric tonnes with this “phase 2” permitted. I could be wrong, but seems you’re both low

  2. Posted by Consistency on

    How they say to look only at the phase 2 portion and not worry about phase 3. They said that the mine is not viable without phase 2 approval… and if that is approved dont you think they will also say the mine is not viable with out phase 3 and that since they did phase 2 they have already put so much money into it that they need phase 3 to be approved.

    I also think that enough time as passed that since they have not done anything with Stiensby the approval they got for that rail line should have an end date to it and be voided. particularly if the rail line to Mile Inlet is approved.

    • Posted by North on

      You don’t really seem to understand how legal contracts work do you? They can go there anytime they want.

      Steensby is a multi billion dollar project. Its not as easy as snowmobiling to another community. Its a massive undertaking

      • Posted by Consistency on

        I am an anonymous poster on a news comment section… why would legal contracts mater. i am suggesting things that i hope make people think. If it can not change what has already happened maybe someone will consider it the next time it comes up.

        • Posted by WB on

          “You don’t really seem to understand how legal contracts work do you? They can go there anytime they want.”

          Actually, new project certificates for mines in Nunavut have something called ‘sunset clauses’ — if the project doesn’t start in 5 years, it should go through another assessment. Granted, the feds can issue an exemption, but there is a clear legal mechanism for new mines to have their approvals expire.

          The catch is, the original (Steensby) portion of the project was approved before this federal legislation was implemented, so there’s no explicit sunset clause.

          • Posted by Centrist on

            Lack of a sunset clause does help the possibility of shipping from Steensby to become a reality. However, the rail line from the Mary to Steensby will take an incredible amount of capital to achieve. A railway that length in the arctic is a massive undertaking that will have to compensate for caribou migration, numerous water crossings and terrain that may have to be tunneled through. That investment may only be possible after a ‘phase three’ is completed and Baffinland becomes more profitable. After the completion of the Steensby project, ore shipping volumes at Milne port may actually decrease due to its inconvenient maritime location and its short shipping season. Steensby may be the future primary port of the mine, Milne port seems to be an economic building block to achieve that goal.

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