Diving Chinese demand hits Canadian iron ore market

Canada’s Labrador Iron Mines (TSX:LIM) said it had cut its capital expenditure (capex) budget as a result of iron-ore prices falling sharply during August.

LIM also deferred about $52 million of planned capital investment to 2013 to preserve its cash resources. The company’s original capex plan for 2012 totalled $112 million, of which $54 million was already committed or had been spent.

The company’s shares were down almost 4% this morning, to $1.50 at 10:00 am ET.

“During this period of weakness and uncertainty in the iron-ore market, it is essential that we remain disciplined in our cash management and capital spending programmes and reduce operating costs,” LIM CEO John Kearney said in a statement.

The company is one of several junior Canadian companies operating in the Labrador Trough, which has been one of the most attractive areas in the country for exploration. A prolonged drop in prices could lead to much slower development in a region that seemed ready to lead Canadian’s iron ore rush for the next decade.

Jackie Przybylowski, an analyst at Desjardins Securities, told the Financial Post that newer producers are especially susceptible to fluctuations in Chinese demand.

More mature companies are selling material in North America and Europe as well as Asia, but the newer miners could not break into Western markets because demand is not growing. Thus, they rely on China. The question is where the price floor will be.

But LIM remains optimistic, noting that current spot prices are below the assumed marginal cost of domestic Chinese production. The company added it believed the spot price had now bottomed out and that a recovery is expected as soon as Chinese steel mills begin re-stocking.

The company also said it was still on track to meet its 2012 sales target of two-million tons of iron-ore at a cash operating cost of $60/t to $65/t unloaded at the port.

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