Canada's "Next Oil Sands Miracle" a Bust

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You can't get there from here. Noront Resources' Eagle's Nest chromite project in the Ring of Fire wilderness region of northern Ontario. Photo: Noront Resources.

Once billed as the economic equivalent of Canada's oil sands industry, the vast oil deposits in the country's western provinces of Alberta and Saskatchewan,where 97% of its oil reserves reside, Ontario's Ring of Fire chromite region held the promise of being an engine of economic growth in its own right worth somewhere north of $120 billion.

Unfortunately it was also mired in parochial biases and competing interests that served to quench any fire for success.

A fraction of its value
Cliffs Natural Resources
was once thought to hold the key to unlocking its potential, but after suspending work in 2013 on its $3.3 billion Black Thor chromite deposit, it gave up all hope of the region ever being developed and began an orderly exit from Canada. That culminated earlier this week with the sale of all of its chromite projects to one of the Ring of Fire's other interested parties, Noront Resources .

Six years ago the two had engaged in a protracted bidding for the rights to the chromite properties with Cliffs emerging victorious and agreeing to pay about $240 million. The just-announced deal, however, has a purchase price of only $20 million, showing how far down the ladder of probability Cliffs believes the region holds for development.

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Once upon a time, Canada's Treasury Board president Tony Clement said chromite mining had the potential to "transform what was hitherto a very poor, underdeveloped area of Ontario and give people who live there, particularly First Nations people, a chance for a decent life." Now one of the premier sites is being sold for a song.

Nerves of stainless steel
Chromite is a rare but key ingredient in the manufacture of stainless steel, and nearly three-quarters of the world's 5.5 billion tonnes of supply is produced in just three countries: South Africa, Kazakhstan, and India. Another 12% comes from Brazil, Finland, Russia, Zimbabwe, and Turkey. It was through Ontario that Canada was looking to break into the field as a major producer.

A key ingredient in the production of stainless steel, chromite has the potential to launch Canada into the top tier of world producers. Image: Wikimedia Commons.

The Ring of Fire is a vast but remote region in the James Bay lowlands, currently only accessible via a two-hour flight from Thunder Bay, the nearest major city. Current estimates suggest it holds the largest deposit of chromite ever found in North America, as well as significant production quantities of nickel, copper, and platinum.

Yet that lack of infrastructure and infighting among the biggest players about how best to achieve it ground progress to a halt and prevented them from exploiting the resources. Because of its remoteness, bringing in equipment or taking ore out was impossible, and each party had its own idea about how best to resolve the problem.

Road to nowhere
Cliffs proposed the construction of an all-weather, north-south, ore-haul road; Noront Resources preferred an east-west road to link up its Eagle's Nest project with a highway some distance away; KWG Resources , the third company with a 30% interest in the Big Daddy chromite deposit (Cliffs owns the other 70%, which it just agreed to sell to Noront), proposed a railroad that would run south to Exton, Ontario.

The problem is the topography only allows one passage to be built, and no one was willing to give in.

Although Cliffs had a conditional agreement with the Ontario government for financial assistance in developing its proposal, the roadway ran right across mining claims belonging to KWG and other resource companies. Where they had once been friendly partners, as the Big Daddy claim shows, they had a falling out over which deposit to develop first, and the two had since become bitter rivals. KWG ended up winning a court battle preventing Cliffs from moving forward.

According to KWG's analysis, while its railroad plan would be more expensive to build than a road would, it would be cheaper to operate over the long haul. It was estimated the road would cost $60.78 per tonne, compared to just $10.50 per million tonnes shipped annually. If 5 million tones are shipped, the costs plunge 40% more for rail, but just 2% more for the road.

As Cliffs once noted, "Without access to the surface lands to develop the needed infrastructure, there is no project." Last year, Cliffs CEO Lourenco Goncalves said he did not expect the Ring of Fire to get developed in the next 50 years.

Hitting the gas
Noront Resources thinks it may be able to accelerate that timeline, not least because itnow owns all the key chromite projects. As part of the sale agreement, Noront will receive a 100% interest in Black Thor, a 100% interest in the Black Label chromite deposit, Cliffs' 70% interest in Big Daddy, and its 85% ownership of the McFauld's Lake copper-zinc resource.

The copper and zinc project at McFauld's Lake in Ontario is also included in the deal. Photo: Cliffs Natural Resources.

And where the federal and Ontario provincial governments previously backed Cliffs' north-south road, they've now agreed to finance a study to examine the feasibility of Noront's proposed east-west road.

The purchase is also being financed by Franco-Nevada , the biggest mining royalty firm in the world, which in return will geta 3% royalty on Black Thor and a 2% royalty on all of Noront's other properties in the Ring of Fire, excluding the Eagle's Nest project.

Certainly there's a lot of smart money betting Noront will be successful, but there remains a lot of opposition to development, particularly from First Nation's in the area, a not inconsiderable roadblock.

While oil sands have provided a big lift to Canada'seconomy, so far chromite has been a bust, and it will be many years before any road is built let alone chromite being dug from the ground.

The article Canada's "Next Oil Sands Miracle" a Bust originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.