Buy-Low Sell-High Dealmaker Says Iron Play Will Turn Profit

(Bloomberg) -- Michael O’Keeffe, the former Glencore Plc executive with a track record of buying low and selling high, says his counter-cyclical approach to dealmaking is about to pay off again.

Champion Iron Ltd., which bought the Bloom Lake iron ore mine out of receivership in 2015, will likely turn a profit in 2018 thanks to the northern Quebec operations. The West Perth-based company is in talks with multiple parties to find a strategic partner to help fund an expansion that would double capacity at the Canadian site, the chief executive officer said in an interview at Bloomberg’s Toronto office.

Bloom Lake is benefiting from “impeccable” timing as an upswing in global iron prices increases margins for its high-grade ore, which is in high demand in East Asia. It’s also getting some tailwinds from the misfortunes of competitors Rio Tinto Group and Anglo American Plc. O’Keeffe estimates a strike at Rio’s majority-owned Iron Ore Co. of Canada, and a suspension of operations at Anglo American’s Minas-Rio in Brazil will take 40 million tons out of about a 150 million-ton market for high-grade iron ore, allowing Champion to increase the premium it commands for its product.

“I had a view where the market was going to go,” he said. “Did I ever think it would be as strong as this? No, I didn’t.”

Buy-Low Sell-High Dealmaker Says Iron Play Will Turn Profit

Champion Iron purchased the defunct Bloom Lake iron mine in 2015 for pennies on the dollar, as iron ore prices fell below $40 a metric ton. In fact, the deal was announced on Dec. 11, the very day the benchmark hit its low for the year; since then, the company’s shares have gained more than 525 percent in Toronto. The new mining operation loaded its first train in February and has been receiving over $85 a ton for its high-grade (66.2 percent) iron ore since then, O’Keeffe said. That’s about $18 a ton more than what benchmark 62 percent iron ore traded at last week.

Bloom Lake has shipped about 1 million tons of iron ore so far, O’Keeffe said. He expects the mine will reach annual full capacity of 7.4 million tons by the end of June -- and the mooted expansion could bring that up to 16 million tons “pretty quickly.” The company is doing a feasibility study on the project and expects to ask for board approval in a couple of months. Meanwhile, O’Keeffe said he’s in talks with various steel mills about forming a strategic partnership to fund the expansion, which he estimates could cost about C$300 million.

It’s not the first time O’Keeffe has been on the right side of the market. In 2011, while chairman of Riversdale Mining Ltd., he completed the sale of the company to Rio for about A$3.9 billion ($2.9 billion). Three years later, Rio sold it for $50 million after booking massive impairments. Rio did its due diligence, O’Keeffe said of its disastrous deal, but bought at the top of the market.

‘Overpaying for Everything’

“Everyone was overpaying for everything,” he said, noting that the same year, Cleveland-Cliffs Inc. acquired Bloom Lake as part of a C$4.2 billion takeover of Consolidated Thompson Iron Mines Ltd. At the time, iron ore was trading around $180 a ton. Four years later, the price had fallen below $40 and Champion Iron was able to buy the asset for C$10.5 million and C$42.8 million in liabilities.

O’Keeffe bought Bloom Lake on the thesis that tighter environmental regulations in China would boost prices for high-grade iron ore. Had he been wrong, the asset would have remained underwater; at the time of purchase it cost Champion about C$1.2 million a month just to maintain its shuttered operations and study its feasibility. “Everyone thought I was smoking pot and I’d totally lost my mind this time around because I was taking such a counter-cyclical view.”

For 2019, O’Keeffe expects to ship 3.5 million tons to China, 3 million tons to Japan and South Korea, and 1 million tons to Europe. The company is focused on internal growth and hasn’t been approached by potential buyers, he said.

“I think the world hasn’t realized what we have,” he said.

©2018 Bloomberg L.P.