It’s not a casualty of the iron ore wars currently being waged on high cost producers here and in countries like China by BHP Billiton, Rio Tinto and Vale.
But the decision by Mount Gibson (MGX) to shut its Koolan Island mine in Western Australia because of unstable mining conditions after a landslip and breach of a sea wall, will have the same effect – it will take a small amount of production out of the heavily oversupplied iron ore market for six months to a year at a minimum.
The announcement by Mount GIbson this morning saw the shares whacked by stampeding investors. The shares plunged by just on 40% to 24.7 cents.
The company said it will mothball the Koolan Island mine for an indefinite period – it could end up being that the mine is shut for good because the current low iron ore price would not make it profitable to re-open.
The mothballing will result in the majority of workers at the site being laid off, and a huge impairment charge being included in its half-year accounts in February.
That impairment charge will be "in addition to the previously flagged non-cash write-off of a $46 million deferred tax asset related to the now-repealed Mineral Resources Rent Tax (MRRT).”
A decision will be taken on the future of the mine by June next year which Mount Gibson said will take into account the outlook for iron-ore prices and exchange rates.
“A decision to move towards recommencing production from the Koolan Island mine will only be made if Mount Gibson believes it is viable to do so,” the company said.
The company said there would be redundancy costs of around $11 million.
Cover for some of the costs associated with the mothballing and repair of the seawall may be found elsewhere.
Mount Gibson confirmed in today’s statement that it has insurance policies "for a variety of circumstances, including property damage and business interruption.”
“Mount Gibson has commenced discussions with its insurers,” the company said.
Mount Gibson’s troubles at Koolan Island mean it no longer expects to meet the recently lowered goal of selling 6.6 million to 7 million tonnes of iron ore in the year to June.
Instead, the company is now targeting annual sales of 4.4 million to 4.8 million tonnes.
The main pit at Koolan Island flooded late last month when the sea wall between the pit and the surrounding ocean gave way.
Mount Gibson had previously evacuated the mine of its personnel and equipment in late October, when there was a slump in a part of the wall.
Koolan Island produces at best 7 million tonnes of ore a year – so its closure won’t have a big impact on the market, but for whatever reason, it will be seen as an early step towards cutting the oversupply, as will Fortescue’s moves over the past week to cut spending next year.
