High-Cost Iron-Ore Producers Face Funding Shortfalls

By Alexis Flynn 

LONDON--Spiraling iron-ore prices are causing distress for mining companies that invested in a risky corner of West Africa when Chinese demand for the steelmaking ingredient soared, but which are now facing critical funding shortfalls.

Iron-ore prices have plunged almost 40% this year, squeezing margins for high-cost producers. The Ebola outbreak devastating the region has meantime pushed up costs for companies operating in Guinea, Sierra Leone and Liberia.

London Mining PLC, whose Marapa mine has helped transform Sierra Leone's war-shattered economy, on Monday said Glencore PLC had stopped, since Sept. 1, advancing it cash for future iron-ore deliveries.

A spokeswoman for London Mining declined to offer an explanation for Glencore's action. Glencore declined to comment.

Glencore might be seeking to renegotiate a more favorable cash-for-ore deal, analysts have said. Analysts with Liberum Capital said Glencore's move bore the hallmarks of previous episodes when the company has stepped in to rescue--and then take control of--distressed companies. For example, in 2009 Glencore provided Katanga Mining with $100 million of financing "at heavily dilutive terms for Katanga shareholders," said Liberum.

Compared with other major mining companies, Glencore has relatively little exposure to iron-ore mining. Instead, its trading division makes money by buying and selling the commodity, and then managing the logistics involved in shipping it from West Africa to China.

The company's half-year earnings showed that it traded more than double the amount of iron ore than in the same period a year earlier.

London Mining's deal with Glencore, known in the industry as an off-take deal, is one of its few sources of working capital, though the company said it has separately agreed a two-year, $30 million, financing plan with the Afreximbank export credit agency. It said it could secure additional funding from other trading firms.

The fall in iron prices to $80 per ton has been harmful to high-cost companies, like London Mining, operating in challenging environments. London Mining spends around $89 producing and shipping each ton of ore. The company, valued at over $300 million just three years ago, has seen its shares plummet nearly 80% this year.

Also on Monday, Bellzone Mining PLC, another London-listed mining company with big prospects in West Africa, suspended its shares as it struggles to conclude a loan agreement for around $2.5 million with principal shareholder China Sonangol International Pte Ltd.

In a statement, Bellzone said it needed the funds in the next few days if it were to continue operations. Without the funding, Bellzone would also be unable to service a previous loan to China Sonangol and would have to hand over the control of the company's key asset, the Kalia mine in Guinea, which it signed over as collateral.

"Glencore and China Sonangol are acting in the same way. They're the guys with the cash and they have the upper hand," said a person who has advised both London Mining and Bellzone.

China Sonangol didn't immediately respond to requests for comment.

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