Labrador Iron Mines

Holdings Limited

TSX: LIM

Investors & Media

Iron Ore Products & Markets

Iron ore is the raw material required to make pig iron, which is the primary (98%) raw material used to make steel. Pure iron ore is virtually unknown on the surface of the Earth except as Fe-Ni alloys from meteorites and very rare forms of deep mantle xenoliths. Therefore, all sources of iron used in industry exploit iron oxide minerals, one of the primary forms of which is hematite. World resources of iron ore are estimated to exceed 800 billion tonnes of crude ore containing more than 230 billion tonnes of iron, implying an average iron content of 28.75%.

Iron ore consists of oxygen and iron atoms bonded together to form the iron-oxide molecule and needs to have the oxygen removed through smelting to create a purer iron product. During this process, the iron ore is heated to extreme temperatures in blast furnaces where lump ore is more stable and therefore preferred. By comparison, iron fines must be sintered before charging to the furnace. The premium associated with lump ore has persisted historically, reflecting the approximate costs required to sinter iron fines, the availability of furnaces required and other benefits including ease of transportation.

Canada produces approximately 40 million tonnes of iron ore annually, most of which is exported, ranking Canada as the fifth largest exporter of iron ore globally. Canadian produced iron ore is generally recognized as being of a high quality and is sought after by steelmakers globally. Since 1999, nearly all of Canada's iron ore production has come from the Labrador Trough region in Labrador and Quebec. As LIM's Project is located near current iron ore producers, the Company is well positioned to capitalize on the existing industry related infrastructure facilitating export of its product to the leading importers of Canadian iron ore.

Iron Ore Types

The major rock types mined for the production of metallic iron are: massive hematite, pisolitic goethite/limonite, which provide a "high-grade" ore, and banded metasedimentary ironstone, magnetite-rich metasomatite, to a much lesser degree, rocks rich in siderite, rocks rich in chamosite which provide a "low-grade" ore. The world's resources are dominated by low-grade ore.

High-Grade Ore

Currently most of the high grade iron ore mined in the world comes from large deposits of massive hematite rock formed by the in situ enrichment of a protore already enriched in iron, most commonly a banded iron formation (BIF). Another type of high-grade deposit is pisolitic limonite/goethite ore formed in ancient river channels.

One of the primary forms of iron ore is hematite, or iron oxide (Fe2O3). Hematite has in the past been referred to as natural ore because certain hematite ores contain up to 69% iron and can be directly fed into blast furnaces in the steel milling process. Hematite ore also lends itself to the beneficiation process unlike lower grade magnetite, and is therefore mined as Direct Shipping ore. All of LIM's deposits are of the high grade hematite variety grading from 56% to as much as 69% iron content (or pure hematite)

The consensus model for the formation of massive hematite ore is enrichment by the passage of fluids, which remove the non-iron-bearing minerals (dominantly chert), and to a much lesser extent add iron minerals. There are several variants of this model with the most accepted being enrichment by supergene processes. Recent models suggest enrichment by mass sideways and upward migration of dominantly superheated meteoric waters perhaps with a minor magmatic component.

Historically high-grade ore has provided direct feed to smelters either as a raw lump or fines, also in a processed form such as sinter or pellets. During the smelting process, the iron ore is heated to extreme temperatures in blast furnaces where lump ore is more stable and therefore preferred.

By comparison, iron fines must be sintered (hence sinter feed) before charging to the furnace. Fines are roasted on a conveyor oven with coke and limestone to produce sinter.

The premium associated with lump ore has persisted historically, reflecting the approximate costs required to sinter iron fines, the availability of furnaces and other benefits including ease of transportation. Labrador Iron Mines expects its lump composition to account for approximately one-quarter of ore produced.

Low-Grade Ore

Low-grade ore is a term applied to iron-rich rocks with cut-off grades in the range of 25-30% Fe. It was the main supply of iron ore for many centuries of the World's early history of production of iron. Since the 1950's North America's main supply has been low-grade ore.

The dominant economic iron mineral in low-grade ore is magnetite. The ore may be beneficiated by a process known as wet-magnetic separation, being an initial fine grinding then passed of the fines over drum magnets to separate out magnetite to produce a high-grade concentrate. This concentrate may be agglomerated into 1 cm pellets and baked to produce a high grade feed for blast furnaces.

Steel Manufacturing

Although iron has many specific uses (pipes, fittings, engine block), its main use is in the production of steel. Steel has several desirable properties, making it the main structural metal in engineering and building projects and accounts for 90% of all metal used each year.

Almost all of the iron ore that is mined globally is used for making steel. Raw iron by itself is not as strong and durable as needed for construction and other purposes. So raw iron is alloyed with a variety of elements (such as tungsten, manganese, nickel, vanadium, chromium) to strengthen and harden it, making useful steel for construction, automobiles, and other forms of transportation such as trucks, trains and train tracks.

While the other uses for iron ore and iron are only a very small amount of the consumption, they provide excellent examples of the ingenuity and the multitude of uses that man can create from our natural resources. For example, iron is essential to animal life and necessary for the health of plants. The human body is 0.006% iron, the majority of which is in the blood. Blood cells rich in iron carry oxygen from the lungs to all parts of the body. Lack of iron also lowers a person's resistance to infection.

Steel requirement falls into two basic sectors, the mass market and the high-end market. Developing nations would mostly derive demand from mass products, which would be addressed by the expanding steel production and trade volumes. On the other hand, the high-end market inclusive of the automobile industry would require better product and performance quality from the steel industry. In addition, increasing industry consolidation, backward integration and cost of raw materials is expected to have a stabilizing affect on steel prices.

Global Steel Industry and Iron Ore Demand

The global steel industry has delivered unprecedented results in recent times and is projected to continue its growth in the long term, albeit at a slower rate. At a global level in 2004, the steel industry became a billion tonne industry, and its growth depends primarily on the consumption of steel in the developing countries, particularly in China and south-east Asia. This demand effectively raised the price of iron ore "fines" from around US$42 per tonne FOB in 2005, to about US$50 per tonne FOB in 2006, US$55 per tonne FOB in 2007, and about US$95 per tonne FOB in 2008. Lump ore has traditionally commanded about a 25% premium to fine ore.

While European and American steel demand has been on the increase, there has been a substantial increase in production in China. Benchmark iron ore pricing negotiations between the major iron ore suppliers and consuming steel manufacturers for 2009 contract prices are still not totally completed. Rio Tinto has settled with a number of Japanese and Korean steel mills at a fines benchmark price reduction of around 33% from 2008 levels. The equivalent price for sinter fine product would be around US$62 per tonne and for lump ore around US$75 per tonne. These price levels are higher than those prevailing in 2007.

China and the major Australian and Brazilian iron ore producers have still not been able to settle a benchmark iron ore price for the year ending March 2010. It is reported that these talks are now looking to set a price for calendar 2010 instead. China is reportedly seeking a benchmark price lower than that set by the major producers with the Japanese and Korean customers for 2009, whilst these producers are seeking an increase on that price to at least match the current spot price. It is unclear whether any agreement will be possible and if not, the spot market will continue to develop as a means of pricing longer term delivery contracts.

It is expected that the sales price of LIM’s iron ore products will largely be based on benchmark reference prices. The future of iron ore pricing will be dependent on both the rate of recovery of world-wide economies and the extent to which current and planned new production capacity has been closed or deferred, and on the speed with which this closed and deferred production can be brought back on stream. LIM is of the view that for 2010, the first year of planned significant commercial production from its Schefferville Project, as global demand turns positive, there will be some recovery of prices over the reduced iron ore prices prevailing in 2009.