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Junior miner Champion Iron agrees to buy troubled Bloom Lake mine in Quebec

A buyer has finally emerged for the troubled Bloom Lake iron ore mine in Quebec, which was shuttered nearly a year ago after incurring massive losses.

Junior miner Champion Iron Ltd. has won an auction to buy the mine out of bankruptcy protection for $10.5 million. Champion, which has offices in Canada and Australia, will also assume $42.8 million of liabilities as part of the agreement.

“Bloom Lake is considered an exceptional opportunity for Champion, and one that would not have presented itself without the challenges of the current downturn in bulk commodities,” executive chairman Michael O’Keeffe said in a statement.

Indeed, the price tag is considerably lower than what Bloom Lake fetched the last time it was sold.

In 2011, U.S. miner Cliffs Natural Resources Inc. acquired the mine for a staggering $4.9 billion in cash. That deal was done at the absolute top of the iron ore market, and turned out to be a disaster for the buyer.

Bloom Lake simply never worked the way Cliffs expected. The company faced major operating challenges and incurred losses quarter after quarter until it finally halted production at the end of 2014. Cliffs then put the mine into creditor protection to insulate itself from future closure costs.

Cliffs was wise to shut down when it did, because Bloom Lake would be losing even more money today due to the crash in iron ore prices. The mine had cash costs of US$91.54 a tonne in 2014, while current iron ore prices are below US$40. Prices have plunged because of soaring production from Australia, which has created a big glut in the market.

It will not be easy for Champion to make the mine profitable.

During the bankruptcy proceedings, the company said it gained “significant insight and confidence” into Bloom Lake. It plans to implement a new mine plan that would boost production to more than seven million tonnes, from six million previously. It also sees opportunities for cost reductions, and revealed that commodity traders and steel producers are interested in buying the output from the mine.

Of course, Champion is unlikely to restart the mine as long as iron ore prices remain this weak. Bloom Lake is currently on so-called “care and maintenance,” which means the plant and equipment are being preserved for a potential restart in the future. Champion said it thinks it can reduce monthly care and maintenance costs. It is trying to raise capital that would allow it to keep the mine in this state for as long as 24 months.

Champion plans to raise $25 million from a private placement in order to buy Bloom Lake. Most of that money will come from O’Keeffe and one other party, who have agreed to invest up to $15 million in the company.

Bloom Lake is just one of many mining assets that are being resold for a fraction of what they fetched during the commodity boom. Another notable example is the Grande Cache coal assets in Alberta, which sold for $1 billion in 2011 and then resold for just two dollars U.S. in 2014.