Last Update: 2005 May 10



### IRON ORE INDUSTRY TRENDS AND ANALYSIS World production of iron ore was at an all time high in 2004 at 1,203 million tonnes and crude steel production increased to 1,055 million tonnes, 9% higher from a year earlier. The consistent debate that this growth is not an indication of booming global demand, but of large growth in the Asia markets, particularly China appear has lost support as demand remains strong throughout the majority of the markets in the world.



### World Production of Iron Ore and Crude Steel 1994-2005 (Mt) 1400- 1200-
1000- Mt 800 600 400
200- 0 1994 1996 1998 2000 2002 2004 Year Steel Production Iron Ore Production

STEEL Source: UNCTAD, IISI, Merrill Lynch, Deutsche Bank
Any analysis of the iron ore industry must include the industry's only customer - the world crude steel industry. The steel industry has undergone rather dramatic changes in the 1990's that continue into the new millennium. Producers have had to make decisions with increasing globalisation, falling prices, market distortions, reduction of trade barriers and opening markets, rising protectionism, development of new technologies, changes in customers structures and the continued problem of over-capacity. Virtually all iron ore production is consumed by the steel industry. Although, world growth of iron ore and steel generally expand and contract inline with world economic growth, a distinct pattern has emerged over the past ten years. Growth in world iron ore production has averaged 1.8%, during which time western world exports have increased 3.4%. This indicates a strong move towards quality as low quality production, particularly in former eastern block countries have closed due to poor economics. In 2004, iron ore exports grew more than 12% to 650 million tonnes from 580 million tonnes in the previous year. Steel producers are demanding high quality iron ore products and rely on an increasing export market to meet this demand. Exports are dominated by two countries; Brazil and Australia. Globalisation is the most significant issue affecting the iron and steel industries and it has forced significant changes in attitude. In the past, steel and iron ore were considered strategic industries. The growing international trade and extensive merger and acquisition activity has seen takeovers and alliances that would have been unheard of just ten years ago Most producers have had to jettison the emotional baggage that comes with the attitude that steel is a strategic core 

# i I Iron Mines Corporation Last Update: 2005 May 10 

### IRON ORE INDUSTRYTRENDS AND ANALYSIS World production of iron ore was at an all time high in 2004 at 1,203 million tonnes and cmde steel production increased to 1,055 million tonnes, 9% higher from a year earlier. The consistent debate that this growth is not an indication ofbooming global demand, butoflargegrowth in the Asiamarkets, particularly Chinaappearhas lost support as demand remains strong throughoutthe majority ofthe markets in the world.



### Mt World Production of Iron Ore and Crude Steel 1994-2005 (Mt) 

## 1400 1200 1**OOO+----------------..,--------:::~'------:;:-~ ~------------** 



## 600 -**-~-----** ---------**-------~----~------~--** ------------------! 

## 400+----------------------

----------- 200 -1------------**----~---~-------** --------**o-·~--,---,----,---,--~----~--,---,---~---,---,--~** 

## 1994 1996 1998

-.- Steel Production 

## 2000 Year 

## 2002

-lIlIII- Iron Ore Production 

## 2004

Source: UNCTAD. IlSI, Merrill Lynch, Deutsche Bank STEEL Any analysis ofthe iron ore industry must include the industry's only customer

- the world cmde steel industry. The steel industry has undergone rather dramatic changes in the 1990's that continue into the new millennium. Producers have had to make decisions with increasing globalisation, falling prices, market distortions, reduction oftrade barriers and opening markets, rising protectionism, development ofnew technologies, changes in customers stmctures and the continuedproblem ofover-capacity. Virtually all iron ore production is consumed by the steel industry. Although, world growth of iron ore and steel generally expand and contractinline with world economic growth, a distinctpattern has emerged over the past ten years. Growth in world iron ore productionhas averaged 1.8%, during which time westernworld exports have increased 3.4%. This indicates a strong move towards quality as low quality production, particularly in former eastern block countries have closed due to poor economics. In 2004, iron ore exports grew more than 12% to 650 million tonnes from 580 million tonnes in the previous year. Steel producers are demanding high quality iron ore products and rely on an increasing exportmarketto meetthis demand. Exports are dominatedbytwo countries; Brazil and Australia. Globalisation is the most significant issue affecting the iron and steel industries and it has forced significant changes in attitude. In the past, steel and iron ore were considered strategic industries. The growing international trade and extensivemerger and acquisition activityhas seen takeovers and alliancesthat wouldhavebeenunheard of justten years ago Most producers have hadtojettisonthe emotional baggage that comes with the attitude that steel is a strategic coreindustry basic to the growth development of a country's wealth and power. Production of steel generally follows the

year to year change in world industrial production and demand, and expected growth rates. The world steel production increase to 1,055 million tonnes in 2004 represents very strong demand in Asia as well as moderate to strong demand elsewhere in the world. Asian demand, particularly China, for steel products represented 41% (281.1 Mt) of world apparent steel consumption in 1998 and is expected to increase to 57% of apparent consumption (565 Mt) in 2005. Although steel is produced in virtually every country, six countries or regions dominate and account for almost 80% of world crude steel production and their imports dominate the seaborne trade of iron ore.
World Steel Production Country/Region 2004 Crude Steel Production (Mt) % of World Total 2004 Seaborne Imports of Iron Ore (Mt) % ofWorld Total European Union - 25 193.3 18.4 175 29.6 USA 98.9 9.4 12 2.0 Japan 112.7 10.8 135 22.8 PR of China 272.5 25.9 208 35.1 S Korea 47.5 4.5 44 7.4 FSU (Russia et al) 111.8 10.6 11 1.8 Sub-total 836.7 79.7 571 96.6 World Total 1,055 100.0 591 100.0 Preliminary 2004 figures Source: IISI, Skillings, Roskill, Merrill Lynch The top six form the primary and most important customers for the iron ore exporting nations. They account for 80% of iron ore imports and, more importantly for Baffinland Iron Mines Corporation, more than 95% of the seaborne iron ore demand

. This consolidation has become even more focussed as three companies , Companhia Vale do Rio Doce SA (CVRD), BHP Billiton Iron Ore (BHPBIO) and the Rio Tinto Hamersley Iron unit (RTHI) control directly 66% of the seaborne trade

. Nearly all iron ore is used to make steel , but not all steel is made from iron ore

. Although the steel industry is not noted for speed of change or innovation, there have been significant changes over the past twenty years. Steel is produced via three processes. The blast furnace remains the principal iron-making route while the basic oxygen furnace (BOF) remains the principal steel-making method accounting for 60% of production. Open hearth furnaces, once the only method of steel making, have been made virtually obsolete, driven out by environmental, operational and cost factors. They still account for 5% of steel production, but it is expected that they will cease to exist by 2007. The electric arc furnace (EAF) steel making process accounts for 35% of world steel production. It uses mostly scrap steel as feedstock. Increasingly, directly reduced iron (DRI) or hot briquetted iron (HBI) has become an important feedstock for the EAF process. The steel market has developed some unusual aspects over the past few years. Initially the Former Soviet Union was a major supplier of quality scrap steel, depressing prices throughout the 1990's. However, its supplies of quality scrap have been greatly reduced. It is important to realise that the EAF process does not improve the quality of steel produced. The quality of the input steel is the same as quality of the output of the steel produced by the EAF method. USA exports of scrap to China over the past two years, due to premium prices paid by Chinese steel mills, caused regional shortages of scrap. Asia now produces 499 million tonnes or 47% of the world's steel production compared to 35% of world output in 1993. As stated above, China leads this growth and is the world's largest steel producer at 272 million tonnes of annual production, up 90 million tonnes from 2002 levels. This increase is twice the annual out put of Germany, the world's fifth largest steel producing country. Analyst forecasts have China's steel production increasing to 400 million tonnes by 2010 with world output increasing to 1,500 million tonnes over the same period. Despite large planned increases in iron ore production by the CVRD, RTHI and BHPBIO, infrastructure capacity issues may impede realisation of these increases.



### 2 

# i I Iron Mines Corporation industry basic to the growth development ofa country's wealth and power. Production ofsteel generally follows the year to year change in world industrial production and demand, and expected growth rates. The world steel production increase to 1,055 million tonnes in 2004 represents very strong demand in Asia as well as moderate to strong demand elsewhere in the world. Asian demand, particularly China, for steel products represented41% (281.1 Mt) ofworld apparent steel consumption in 1998 and is expected to increase to 57% of apparent consumption (565 Mt) in 2005. Although steel is produced in virtually every country, six countries or regions dominate and account for almost 80% ofworld crude steel production and their imports dominate the seaborue trade ofiron ore. WorldSteel Production Country/Region 2004 CrudeSteel % ofWorldTotal 2004 Seaborne Imports % ofWorldTotal Production (Mt) ofIron Ore (Mt) EuropeanUnion

- 25 193.3 18.4 175 29.6 USA 98.9 9.4 12 2.0 Japan 112.7 10.8 135 22.8 PRofChina 272.5 25.9 208 35.1 S Korea 47.5 4.5 44 7.4 FSU (Russia et al) 111.8 10.6 II 1.8 Sub-total 836.7 79.7 571 96.6 World Total 1,055 100.0 591 100.0

.. Prell1lllllUlY2004 figures Source. lIS!, SkIllmgs, Rasklll, Mernll Lynch The top six form theprimary and mostimportant customers for the iron ore exporting nations. They account for 80% of iron ore imports and, more importantly for Baffinland Iron Mines Corporation, more than 95% ofthe seaborne iron ore demand. This consolidation has become even more focussed as three companies, Companhia Vale do Rio Doce SA (CVRD), BHP Billiton Iron Ore (BHPBIO) and the Rio Tinto Hamersley Iron unit (RTHI) control directly 66% ofthe seaborne trade. Nearly all iron ore is used to make steel, but not all steel is made from iron ore. Although the steel industry is not noted for speed ofchange or innovation, there have been significant changes over the pasttwentyyears. Steel is producedviathreeprocesses. The blast furnace remains the principal iron-making route while the basic oxygen furnace (BOF) remains the principal steel-making method accounting for 60% ofproduction. Open hearth furnaces, once the only method ofsteel making, have been made virtually obsolete, driven out by environmental, operational and cost factors. They still account for 5% ofsteel production, butit is expected thatthey will cease to existby 2007. The electric arc furnace (EAF) steel making process accounts for 35% of world steel production. It uses mostly scrap steel as feedstock. Increasingly, directly reduced iron (DRI) orhotbriquettediron (HBI) hasbecome animportantfeedstock for the EAF process. The steel market has developed some unusual aspects over the past few years. Initially the Former Soviet Union was a major supplier ofquality scrap steel, depressing prices throughout the 1990's. However, its supplies ofquality scrap have been greatly reduced. It is important to realise that the EAF process does not improve the quality of steel produced. The quality ofthe input steel is the same as quality ofthe output ofthe steel produced by the EAF method. USA exports of scrap to China over the past two years, due to premium prices paid by Chinese steel mills, caused regional shortages ofscrap. Asia now produces 499 million tonnes or47% ofthe world's steel production compared to 35% ofworld output in 1993. As stated above, China leads this growth and is the world's largest steel producer at 272 million tonnes ofannual production, up 90 million tonnes from 2002 levels. This increase is twice the annual output of Germany, the world's fifth largest steel producing country. Analyst forecasts have China's steel production increasing to 400 million tonnes by2010 with world output increasing to 1,500 milliontonnes overthe same period. Despite large planned increases in iron ore production by the CVRD, RTHI and BHPBIO, infrastructure capacity issues may impede realisation ofthese increases.



### 2The Steel Making Process

IRON ORE F4aduoes mc1_:vr pigs fan from irarr oro. Mnttsa. ft- ±L Y ,L,i]t`"`1-IIR1 Blast Fin- Pig Iron Casting Source: IISI, Steel.org

World iron ore production totalled 1,203 million tonnes in 2004, up 10% from 2003 as iron ore companies stretched production to meet demand. Although iron ore production is widely spread occurring in almost fifty countries, the bulk of world production came from just five countries. The five largest producers Brazil, Australia, China, the former Soviet Union and India account for more than 76% of the world total.
Production and exports of iron ore by principal countries, 2004 Production (Mt) % of total Exports (Mt) % exported % of total Country Brazil 220 22.6 205 93 32 Australia 231 19.4 222 96 32 China 147 note 1 11.3 0 n/a 0 Russia 95 8.4 18 19 3 India 110 9.7 67 61 9 Ukraine 66 5.8 19 29 3 USA 54 4.5 7 13 1 South Africa 40 3.5 28 70 4 Canada 31 3.0 17 55 5 Sweden 22 2.0 17 77 3 Sub-total 1016 84.5 600 59 93 World total 1203 650 Note I: Normalised to 65% Fe equivalent, actual output 262 Mt plus 50-60 Mt of estimated unofficial production; FSU exports are dominantly internal to CIS countries and former Eastern

block countries; India sold -30 Mt to China on a spot market basis in 2004 and in 2005 Q 1, an additional -30 Mt similar amount sold. Preliminary 2004 figures Source: Mining Journal, UNCTAD, Roskill, Skillings Iron ore producers historically fell into two basic categories, captive producers and exporters. Captive producers were those owned by the steel companies and generally sold its production exclusively to owner-customer. Producers were dominantly captive in the past, but this has and will continue to change. Steel producers may maintain a minority or strategic interest in iron ore companies, but want flexibility of supply. Iron ore is predominantly sold via long-term contracts that specify certain volumes that the steel producer must take. In both Asia and Europe, steel producers form buying cartels. Prices are negotiated annually in so-called mating seasons. 3 

# i I Iron Mines Corporation The Steel MakingProcess

PIg IronCasting Source: lISI, SteeLorg
IRON ORE World iron ore production totalled 1,203 million tonnes in 2004, up 10% from 2003 as iron ore companies stretched production to meet demand, Although iron ore production is widely spread occurring in almost fifty countries, the bulk ofworldproduction came fromjustfive countries, The five largestproducers Brazil, Australia, China, the former Soviet Union and India account for more than 76% ofthe worldtotaL
Production and exports ofiron ore byprincipalcountries, 2004 Production (Mt} % oftotal EXl10rts (Mt} % eXl10rted % oftotal Country Brazil 220 22.6 205 93 32 Australia 231 19.4 222 96 32 China 147 note 1 11.3 0 n/a 0 Russia 95 8.4 18 19 3 India 110 9.7 67 61 9 Ukraine 66 5.8 19 29 3 USA 54 4.5 7 13 South Africa 40 3.5 28 70 4 Canada 31 3.0 17 55 5 Sweden 22 2.0 17 77 3 Sub-total 1016 84.5 600 59 93 World total 1203 650 Note 1. Nonllahsed to 65% Fe eqUIvalent, actual output 262 Mtplus**50~60** Mt ofestimatedunofficial productIOn, FSU exports are dommantly mternal to CIS countnes and famler Eastern block countries; India sold -30 Mt to China on a spotmarketbasis in 2004 and in 2005 QI, an additional-3D Mt similaramount sold. Preliminary2004 figures Source: Mining Journal, UNCTAD, Roskill, Skillings Iron oreproducers historically fell into two basic categories, captive producers and exporters. Captive producers were those ownedbythe steel companies and generally soldits production exclusivelyto owner-customer. Producers were dominantly captive in thepast, butthis has and will continue to change. Steelproducers maymaintain aminority or strategic interest in iron ore companies, butwant flexibility ofsupply. Iron ore is predominantly sold via long-term contracts that specifycertainvolumes that the steel producermusttake. In bothAsia and Europe, steel producers form buying cartels. Prices are negotiated annuallyin so-called mating seasons. 3The initial price settlement is very important as it traditionally sets the basis or benchmark for other company's

negotiations. In Asia, BHPBIO operations and RTHI are the traditional price setters, while CVRD sets the benchmark for European sales. In the past, the first company to settle on price will gain volume at the expense of other producers. More recently, CVRD has been the company setting benchmark prices in both hemispheres. There is considerable animosity amongst both steel and iron ore producers about who settles on pricing and thereby sets the benchmark. China has publicly complained that, as the largest importer of iron ore, it should be the trendsetter not Japan. In early 1999, BHPBIO and RTHI announced that they would jointly market their iron ore production. Although the attempt failed due to disagreements over the value of each other's businesses, the effort did shock the Japanese Steel Mills (JSM) buying cartel. One steel producer, NKK Corp., stated that CVRD is poised to displace RTIO and BHPBIO as the price setters for the Japanese market. Further strong rhetoric between the JSM and BHPBIO/RTHI has led to the following comments: "...return to market fundamentals as the Asian crisis recedes or risk future reliability of supplies to your blast furnace. (BHPBIO) The JSM countered by detailing the incremental improvement expected in steel output across the Japanese industry and the Australian iron ore industry's dependence upon exports to Asia. " Year to year prices can be variable and comparing prices can be complex. Prices are quoted in dry iron ore units (% Fe), either dry long ton units (dltu) in Japan and dry metric tonne units (dmtu) in Europe. To add to the confusion, European prices are quoted CIF, including customs/cost, insurance and freight to European ports, while Japan quotes prices are FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations of deleterious elements such as phosphorus, base metals, sulphur, alkalis, silica, alumina and titania oxide. Markets for iron ore trade in the late 1990's were optimistic for the immediate future with seaborne iron ore shipments increasing to 591 million tonnes in 2004. Total exports (includes non-seaborne trade) are estimated to be 650 million tonnes. In 2003, slow growth in Asia and the general marginal profitability of the Japanese Steel Mills led many market analysts to forecast a 3 to 5% decrease in iron ore prices in 2003. The actual price change was an increase of 9% in sinter and lump prices and in 2004, prices increased by 18 to 22%. On February 22nd, the announced price increase for iron ore sale products between CVRD and Nippon Steel was 71.5% for 2005. The increase is justified by a weakening US dollar, extremely strong steel demand and corresponding strong demand for iron ore. Iron ore producers have noted strong steel prices to justify both the iron price increase and the increase in coking coal prices by an average 120% in 2005. Despite strong steel prices, the steel mills state that steel prices have only increased to 1980 price levels and note that prices during the period 1990-2003 were artificially low. BHPBIO and RTHI commented that the large price increases will not attract significant new entrants to the iron ore industry. They argue that development of a quality iron ore deposit and entry into the market is a difficult task due to the inherent barriers associated with finding and developing a quality iron ore deposit. The comment that not all iron ore deposits are equal and the importance of developing a quality sale product is not very well understood by the non-iron ore industry. More recently, the price increase for Carajas pellets was 86.67% and Carajas lump into Europe was 79%. This increase in the price of lump has allowed Carajas lump to pass the Brockman lump in price per Fe unit. Previously, Carajas was discounted to the Australian lump due to excessive fines (-6.3 mm) generation. The price increase and growth in the iron ore industry has been fuelled by China's voracious consumption of all raw materials. China's demand for iron ore has been consistently underestimated throughout the past ten years. China Economic Net reports that iron ore prices for iron ore imported from India on a spot market basis has dropped sharply from US$ 97 per tonne to US$ 85 per tonne for sinter feed purportedly representing a weakening in the market. This per tonne price compares to some US$ 37 per tonne of sinter feed even with the 2005 price increase. Extracting shipping costs, China was buying iron ore at two to three times the price steel makers with long-term contracts were paying in 2004. Prices have dropped but a premium of more than 50% over the 2005 price remains for spot sales. Shortages of raw material for the blast furnace has had some steel producers buying `iron credits' with little or no regard to deleterious elements or quality. This allowed unofficial or illegal producers to profit in the market. Most of the massive growth in India exports has been spot sales to China and much has been from production that is of questionable sustainability. Specifications of sale were limited to a minimum iron content of 63.5% Fe. This will change in the future as China will move to quality iron ores and much of India's export will disappear from the market. 4 

# i I Corporation

The initialprice settlement is veryimportant as ittraditionally sets the basis orbenchmark for othercompany's negotiations. In Asia, BHPBIO operations and RTHI are the traditionalprice setters, while CVRD sets the benchmark for European sales. In the past, the first companyto settle onpricewill gain volume atthe expense ofotherproducers. Morerecently, CVRD has beenthe company settingbenchmarkprices in bothhemispheres. There is considerable animosity amongstboth steel andiron ore producers aboutwho settles onpricing andthereby sets the benchmark. Chinahas publicly complainedthat, as the largest importer ofiron ore, it shouldbe the trendsetter notJapan. In early 1999, BHPBIO and RTHI announced thattheywouldjointlymarkettheiriron ore production. Althoughthe attempt failed due to disagreements overthe value ofeach other'sbusinesses, the effort did shockthe Japanese Steel Mills (JSM) buying cartel. One steel producer, NKK Corp., statedthat CVRD is poised to displace RTIO and BHPBIO as the price setters for the Japanesemarket. Further strongrhetoric betweenthe JSM and BHPBIO/RTHI has led to the following comments: "

...return to marketfitndamentals as theAsian crisis recedes or riskfitture reliability of supplies to your blastfitrnace. (BHPBIO) The JSMcounteredby detailing the incremental improvement expected in steel output across the Japanese industlYandtheAustralian iron ore industlY's dependence upon exports toAsia. " 

### Yearto yearprices canbe variable and comparingprices canbe complex. Prices are quoted in dry iron ore units (% Fe), either dry long ton units (dltu) in Japan and drymetric tonne units (dmtu) in Europe. To add to the confusion, European prices are quoted CIF, including customs/cost, insurance and freight to European ports, while Japan quotes prices are FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations ofdeleterious elements such as phosphorus, basemetals, sulphur, alkalis, silica, alumina andtitaniaoxide. Markets for iron ore trade in the late 1990's were optimistic for the immediate future with seaborne iron ore shipments increasing to 591 million tonnes in 2004. Total exports (includes non-seaborne trade) are estimated to be 650 million tonnes. In2003, slow growth in Asia and the general marginalprofitability ofthe Japanese Steel Mills ledmanymarket analysts to forecast a 3 to 5% decrease in iron ore prices in 2003. The actual price change was an increase of9% in sinter and lump prices and in 2004, prices increasedby 18 to 22%. On February 22nd, the announcedprice increase for iron ore sale products between CVRD and Nippon Steel was 71.5% for 2005. The increase isjustifiedby a weakening US dollar, extremely strong steel demand and corresponding strong demand for iron ore. Iron ore producers have noted strong steel prices tojustifyboth the iron price increase and the increase in coking coal prices by an average 120% in 2005. Despite strong steel prices, the steel mills state that steel prices have only increased to 1980 price levels and note thatprices during theperiod 1990-2003 were artificially low. BHPBIO and RTHI commented that the large price increases will not attract significant new entrants to the iron ore industry. They argue that development ofa quality iron ore deposit and entry into the market is a difficult task due to the inherentbarriers associated with finding and developing aquality iron ore deposit. The commentthat not all iron ore deposits are equal and the importance ofdeveloping a quality sale product is not very well understood by the non-iron ore industry. More recently, the price increase for Carajas pellets was 86.67% and Carajas lump into Europe was 79%. This increase in the price oflumphas allowed Carajas lump to pass the Brockman lump in priceperFeunit. Previously, Carajas was discounted to the Australianlump due to excessive fines (-6.3 mm) generation. The price increase and growth in the iron ore industry has been fuelled by China's voracious consumption ofall raw materials. China's demand for iron ore has been consistently underestimated throughout the past ten years. China Economic Net reports that iron ore prices for iron ore imported from India on a spot market basis has dropped sharply from US$ 97 pertonne to US$ 85 pertonne for sinter feed purportedlyrepresenting aweakening in the market. Thisper tonne price compares to some US$ 37 per tonne ofsinter feed even with the 2005 price increase. Extracting shipping costs, China was buying iron ore at two to three times the price steel makers with long-term contracts were paying in 2004. Prices have dropped but apremium ofmore than 50% over the 2005 price remains for spot sales. Shortages of raw material for the blast furnace has had some steel producers buying 'iron credits' with little or no regard to deleterious elements or quality. This allowedunofficial or illegalproducers to profit in the market. Most ofthe massive growth in India exports has been spot sales to China and much has been from production that is of questionable sustainability. Specifications ofsale were limited to a minimum iron content of 63.5% Fe. This will change in the future as Chinawill move to quality iron ores and much oflndia'sexportwill disappearfrom the market. 

### 4Iron N/1irlos CcrpcretLon

MiningNews.net reports estimates over the past few years by market analysts for Chinese iron ore imports have been increasing from an expected importation of 250 million tonnes of iron ore by 2015 to almost 500 million tonnes by the same year. This amounts to the entire world's iron ore export market for 2002. Merrill Lynch has China's expected consumption of iron ore increasing to more than 800 million tonnes by 2009 and import requirements increasing to 427 million tonnes over the same period. Massive increases in iron ore consumption in China and Asia as a whole have overshadowed moderate to strong growth in consumption of iron ore elsewhere in the world.



### World Iron Ore Imports by Principal Destination, 1990

-2004 (Mt)

250

Mt 200 -

150 -I

100 -

50 d

1990 1992 1994 1996 1998 Year 2000 2002 2004e Europe (15) Japan China Other

Source: UNCTAD, Deutsche Bank, Merrill Lynch
Competition amongst iron ore producers is fierce. In the past, buying cartels have kept prices low by playing on the competitive and antagonistic behaviour of producers. Shipping rates in the fifteen year period from 1983-1998 steadily decreased. In 1998, ocean freight rates fell quite dramatically, which reduced the cost advantage that the Australian producers held in the Asian markets. This allowed Brazil's CVRD to make significant market penetration into the Asian markets. Shipping rates have increased due to the increase in oil prices and tight capacity for bulk carriers, but the markets have changed and long-term contract shipping rates appear to have levelled the playing field for producers.



### 5 

# i 

# I Iron Mines Corporation
MiningNews.net reports estimates over the past few years by market analysts for Chinese iron ore imports have been increasing from an expected importation of250 million tonnes ofiron ore by 2015 to almost 500 million tonnes by the same year. This amounts to the entire world's iron ore export market for 2002. Merrill Lynch has China's expected consumption ofiron ore increasing to more than 800 million tonnes by 2009 and import requirements increasing to 427 million tonnes over the same period. Massive increases in iron ore consumption in China and Asia as a whole have overshadowedmoderate to strong growth in consumption ofiron ore elsewhere in the world.

Mt

### World Iron Ore Imports by Principal Destination, 1990-2004 (Mt)
250

200

-

150

100

-

50

0- 1990 1992 1994 1996 1998 2000 Year 2002 2004e 

### -+- Europe (15) -.ir-Japan _China Other

Sourcc: UNCTAD, Deutschc Bank, Merrill Lynch Competition amongst iron ore producers is fierce. In the past, buying cartels have kept prices low by playing on the competitive and antagonistic behaviour ofproducers. Shipping rates in the fifteen yearperiod from 1983-1998 steadily decreased. In 1998, ocean freight rates fell quite dramatically, which reduced the cost advantage that the Australian producers held in the Asian markets. This allowedBrazil's CVRD to make significantmarketpenetration into the Asian markets. Shipping rates have increased due to the increase in oil prices and tight capacity for bulk carriers, but the markets have changed andlong-termcontract shippingrates appearto have levelled the playing field forproducers.



### 5Iron [`./lir S 7or pnnrn1lon
Representative Spot Iron Ore Freight Rates, 1993 to 2004 ($/t) W.Africa2- Brazil- Canada- Australia

- Norway- Brazil

- AustraliaContinent Continent Continent Continent Continent China/Japan Japan 1993 3.6 5.6 5.2 7.4 2.9 9.2

... 1994 4.1 6.4 6.3 9.0 3.2 10.3

... 1995 5.4 7.6 7.2 9.9 3.9 13.5

... 1996 4.2 5.6 5.3 7.0 3.0 9.1 4.4 1997 4.2 6.2 5.5 7.5 3.2 10.7 5.0 1998 2.8 4.5 4.0 6.0 2.4 6.5 3.7 1999

... 4.7 4.0 6.7 2.5 6.9 3.7 2000

... 7.5 6.2 10.9 3.5 11.7 6.3 2001

... 5.4 4.6 7.8 2.5 8.4 4.3 2002

... 5.4 4.4 7.0 2.5 8.7 4.1 2003

... 8.3 6.6 10.7 3.5 14.1 6.8 2004

... 19.7

... 21.1 6.8 33.1 15.6 2005 e

... 17.5 gore 2 12.1 -1 2

... 6.9 note 2

... ... Note 2: proposed long-term contract rate includes unloading at terminalport ($1.75/1) Source: Drewry Shipping Consultants, SSY Short-term freight rates have increased two and three-fold due to the attempt to meet China's demand. Individual spot prices have seen rates for India-China exceeding $60 per tonne, while Brazil-China have reportedly exceeded $80 per tonne. Steel mills, short of iron ore product, have reportedly paid as much as $160 per tonne for a shipment of much needed iron ore. It is important to realise that the great majority of shipping rates for all bulk commodities are negotiated through long-term contracts. These rates fix an exporters and importers cost over a period of time, on average ten years. The prices have an inflator for fuel increases based upon an agreed formula. However, producers or consumers that underestimate or do not cover their contract positions have been forced to access the spot market to meet obligations. In many instances, the freight rate was more than the value of the cargo. Port and handling capacity at many of Asia's ports have been severely stretched and it is reported that ships have waited several weeks to unload their cargo. Slightly lower shipping rates for iron products are expected in the near future and long-term rates should be similar to those reported for 2005. However, safety and environmental legislation in Europe will force all shipping companies to use double-hulled bulk carriers by 2012. Tankers must meet this requirement earlier. Similar legislation has been tabled in Japan and the USA, despite fierce lobbying by ship owners. Rates will have to rise to allow companies to repay significant capital outlays for new safer double-hulled fleets. This will be offset by cost savings on insurance premiums that have risen dramatically in the 1990's to accommodate past ship wreaks and oil spills. These `preventable' accidents have lead to increased demand for safer and better quality ships. Additional cost savings will also be realised due to more efficient designs and faster loading and unloading times. Customers and producers will focus on price, quality, reliability of supply and transportation during contract negotiations. The exploitation of a quality resource, such as the Brockman lump iron ore (the primary source of lump for BHPBIO and RTHI), has made RTHI the most profitable unit in the Rio Tinto Group over the past twenty years. The Rio Tinto Group strategy is to differentiate itself as a low cost leader in mineral production. It does this by focusing on its core competence, large-scale low-cost open cast mining of superior resources. It is these resources that allow the Group to succeed at this strategy. The quality lump deposits have allowed the Group to differentiate itself in the iron ore industry as the lowest cost producer. Initial production in Australia started in 1966 at 5 million tonnes per year. In 2003, RTHI shipped 72.8 million tonnes of iron ore and has increased its Pilbara operations nominal capacity to 74 million tonnes per annum. Major capital expenditures were recently announced to increase this capacity by 50% to accommodate Asian demand. RTHI also sold 58.4 million tonnes through its Robe River Mining and Iron Ore Company of Canada operations. Over the last few years, two of the dominant iron ore exporter-producers have purchased competitors to strengthen their position in their home market. Rio Tinto bought North Limited, which controls the Robe River and IOC operations. In Brazil, CVRD bought control of Ferteco, Samitri and Samarco, adding some 35 million tonnes of production to its already massive production levels. This consolidation of production and the failed attempt of RTHI and BHPBIO to 6 

# i 

# I iron Mines Corporation
Representative SpotIron OreFreightRates, 1993 to 2004 ($/t) W.Africa'- Brazil- Canada- Australia- Norwav- Brazil- AustraliaContinent Continent Continent Continent Continent China/Ja[!an Ja[!an 1993 3.6 5.6 5.2 7.4 2.9 9.2 1994 4.1 6.4 6.3 9.0 3.2 10.3 1995 5.4 7.6 7.2 9.9 3.9 13.5 1996 4.2 5.6 5.3 7.0 3.0 9.1 4.4 1997 4.2 6.2 5.5 7.5 3.2 10.7 5.0 1998 2.8 4.5 4.0 6.0 2.4 6.5 3.7 1999 4.7 4.0 6.7 2.5 6.9 3.7 2000 7.5 6.2 10.9 3.5 11.7 6.3 2001 5.4 4.6 7.8 2.5 8.4 4.3 2002 5.4 4.4 7.0 2.5 8.7 4.1 2003 8.3 6.6 10.7 3.5 14.1 6.8 2004 19.7 21.1 6.8 33.1 15.6 2005e 17.5 flore2 12.1 note2 6.911ote2 Note2:proposedlong-term contractrateinc/lldes IInloadingatterminalport (-$1.751t) Source: Drewry Shipping Consultants, SSY Short-term freight rates have increased two and three-fold due to the attempt to meet China's demand. Individual spot prices have seen rates for India-China exceeding $60 per tonne, while Brazil-China have reportedly exceeded $80 per tonne. Steel mills, short ofiron ore product, have reportedly paid as much as $160 per tonne for a shipment ofmuch needed iron ore. It is important to realise that the great majority of shipping rates for all bulk commodities are negotiated through long-term contracts. These rates fix an exporters and importers cost over a period of time, on average tenyears. The prices have an inflator for filel increases basedupon an agreed formula. However, producers or consumers that underestimate or do not covertheir contractpositions havebeen forced to access the spot market to meet obligations. In many instances, the freight rate was more than the value ofthe cargo. Port and handling capacity at many ofAsia'sports havebeen severely stretched and it is reportedthat ships have waited several weeks to unload their cargo. Slightly lower shipping rates for iron products are expected in the near future and long-term rates should be similar to those reported for 2005. However, safety and environmental legislation in Europe will force all shipping companies to use double-hulledbulk carriersby2012. Tankers must meet this requirementearlier. Similarlegislationhas beentabled in Japan and the USA, despite fierce lobbying by ship owners. Rates will have to rise to allow companies to repay significant capital outlays for new safer double-hulled fleets. This willbe offsetbycost savings on insurance premiums thathave risen dramatically in the 1990's to accommodatepast ship wreaks and oil spills. These 'preventable' accidents have lead to increased demand for safer and better quality ships. Additional cost savings will also be realised due to more efficient designs and faster loading andunloadingtimes. Customers and producers will focus on price, quality, reliability of supply and transportation during contract negotiations. The exploitation ofa quality resource, such as the Brockman lump iron ore (the primary source oflump for BHPBIO and RTHI), has made RTHI the most profitable unit in the Rio Tinto Group over the past twenty years. The Rio Tinto Group strategy is to differentiate itselfas a low cost leader in mineralproduction. Itdoes this byfocusing on its core competence, large-scale low-cost open cast mining ofsuperior resources. Itis these resources that allow the Group to succeed at this strategy. The quality lump deposits have allowedthe Group to differentiate itselfin the iron ore industry as the lowest cost producer. Initial production in Australia started in 1966 at 5 million tonnes per year. In 2003, RTHI shipped 72.8 million tonnes ofiron ore and has increased its Pilbara operations nominal capacity to 74 million tonnes per annum. Major capital expenditures were recently announced to increase this capacity by 50% to accommodate Asian demand. RTHI also sold 58.4 million tonnes through its Robe River Mining and Iron Ore Company ofCanada operations. Over the last few years, two ofthe dominant iron ore exporter-producers have purchased competitors to strengthen their position in theirhome market. Rio Tinto boughtNorth Limited, which controls the Robe River and IOC operations. In Brazil, CVRD bought control of Ferteco, Samitri and Samarco, adding some 35 million tonnes ofproduction to its already massive production levels. This consolidation ofproduction and the failed attempt ofRTHI and BHPBIO to 

### 6jointly market their ores have created a level of concern amongst steel producers and new opportunities for a new

operation with a quality product. Currently CVRD, BHPBIO and RTHI have expansion plans to increase iron ore output significantly. By the end of the decade, RTHI plans to increase output by 54 million tonnes, BHPBIO by 80 million tonnes and CVRD by 101 million tonnes. In the cases of BHPBIO and RTHI, infrastructure is at capacity and to meet these planned expansions will require new rail and port capacity. The increases would add to the big threes already dominate market position. Currently they control more than 66% of the seaborne trade in iron ore, a 4% drop from 2003. Including all reported planned projects; output is expected to increase 508 million tonnes by the end of the decade. Despite the increased output, demand and supply is expected to remain closely aligned. The major iron ore producers will avoid a market over supply. CVRD and BHP Billiton have actually stated that they would be willing to produce below their full capacity utilization rates in order to maintain a balanced market in case there is a significant drop in demand. Despite these statements, there are several companies seeking to develop on-the-shelf resources. Profitable development and expansion of these projects will be dependent upon the quality of the resource potential. Over the past two decades, steel mills have focused their purchases on iron ore products with specific characteristics to maximise productivity in the blast furnace. The strength of the buyer (steel mills) allowed them to force the iron ore companies to develop a better quality product with low deleterious elements and specific metallurgical properties. More recently, the iron ore producers, primarily the big three, have limited their sale products to several standardised products. Output from a specific mine is limited and considerable blending occurs. Quality remains consistent, however the shift in power has moved to the sellers (iron ore producers). China is less concerned with quality presently, however this will change in the very near future. The move towards quality iron ore products remains a constant in the future. This bodes well for Baffinland as a high grade lump and sinter product will be well received by the steel producers, particularly European steel mills. Primary Competitors in the USA and European Markets Company Location 2004 Shipments (Mt) Product Primary Customer CVRD North System Brazil 227.5 Fines, Pellets, Lump Europe, Asia, USA South System Brazil Fines, Pellets MBR Brazil Fines, Pellets Samarco Brazil Fines, Pellets Quebec Cartier Canada Pellets, Fines Rio Tinto Hamersley Iron Australia 107.8 Fines, Lump Asia, Europe Robe River Australia Fines, Lump Asia, Europe Iron Ore Company Canada Pellets, Fines USA, Europe BHP Billiton Iron Ore Australia 95.9 Fines Lump Asia, Europe Samarco Brazil Fines LKAB Sweden 22.3 Fines, Pellets, Lump Europe SNIM Mauritania 9.8 Fines, Pellets Europe, Asia CVG Venezuela 22.4 Fines, Pellets Europe, Local Kumba South Africa 30.1 Lump, Fines Asia, Europe Note: shipments include non-seaborne iron ore trade Source: Annual Reports, Skillings India has increased iron ore exports at the expense of domestic sales and in its haste to meet China's demand has left some domestic steel producers short of product. In addition, a considerable portion of the production increase has been of questionable quality and sustainability. Government pressure to mitigate the damage caused to local steel mills will see iron export growth curtailed and CVRD, RTHI and BHPBIO control of the seaborne trade should return to 70+% market share over the next few years.

7 

# i I Iron Mines Corporation jointly market their ores have created a level of concern amongst steel producers and new opportunities for a new operationwith a qualityproduct. Currently CVRD, BHPBIO and RTHI have expansion plans to increase iron ore output significantly. By the end ofthe decade, RTHI plans to increase output by 54 million tonnes, BHPBIO by 80 million tonnes and CVRD by 101 million tonnes. In the cases ofBHPBIO and RTHI, infrastructure is at capacity and to meet these planned expansions will require new rail and port capacity. The increases would add to the big threes already dominate market position. Currently they control more than 66% ofthe seaborne trade in iron ore, a 4% drop from 2003. Including all reported plannedprojects; outputis expectedto increase 508 milliontonnes bythe end ofthe decade. Despite the increased output, demand and supply is expected to remain closely aligned. The major iron ore producers will avoid a market over supply. CVRD and BHP Billiton have actually stated that they would be willing to produce below their full capacity utilization rates in order to maintain a balanced market in case there is a significant drop in demand. Despite these statements, there are several companies seeking to develop on-the-shelfresources. Profitable development and expansion ofthese projects willbedependentuponthe quality ofthe resource potential. Over the past two decades, steel mills have focused their purchases on iron ore products with specific characteristics to maximise productivity in the blast furnace. The strength ofthe buyer (steel mills) allowed them to force the iron ore companies to develop a better qualityproductwith low deleterious elements and specific metallurgicalproperties. More recently, the iron oreproducers, primarilythe big three, have limitedtheir saleproducts to several standardisedproducts. Output from a specific mine is limited and considerable blending occurs. Quality remains consistent, however the shift inpowerhas movedto the sellers (iron oreproducers). China is less concernedwith qualitypresently, howeverthis will change in the very nearfuture. The move towards quality iron ore products remains a constantinthe future. This bodes well for Baffinland as a high grade lump and sinter product will be well received by the steel producers, particularly European steelmills. PrimaryCompetitors in the USA and European Markets Company Location 2004 Shipments (Mt) Product PrimaryCustomer CVRD North System Brazil 227.5 Fines, Pellets, Lump Europe, Asia, USA South System Brazil Fines, Pellets MBR Brazil Fines, Pellets Samarco Brazil Fines, Pellets Quebec Cartier Canada Pellets, Fines Rio Tinto Hamersley Iron Australia 107.8 Fines, Lump Asia, Europe Robe River Australia Fines, Lump Asia, Europe Iron Ore Company Canada Pellets, Fines USA, Europe BHPBilliton Iron Ore Australia 95.9 Fines Lump Asia, Europe Samarco Brazil Fines LKAB Sweden 22.3 Fines,Pellets, Lump Europe SNIM Mauritania 9.8 Fines, Pellets Europe, Asia CVG Venezuela 22.4 Fines, Pellets Europe, Local Kumba SouthAfrica 30.1 Lump, Fines Asia, Europe Note. shIpments mcludc non-seaborne IroTI ore trade Source. Annual Reports, Skllhngs India has increased iron ore exports at the expense ofdomestic sales and in its haste to meet China's demand has left some domestic steel producers short ofproduct. In addition, a considerable portion ofthe production increase has been ofquestionable quality and sustainability. Government pressure to mitigate the damage caused to local steel mills will see iron export growth curtailed and CVRD, RTHI and BHPBIO control ofthe seaborne trade should return to 70+% market share overthe next few years.

7Corporate Control of Iron Ore Production and Exports, 2004 (% of world total) Production Trade CVRD 14 32 Rio Tinto 8 19 BHP Billiton 7 15 Total 29 66 Source: UNCTAD Iron ore prices are set each year in complex negotiations by RTHI, BHPBIO or CVRD. These prices form the basis for prices received by other producers, based upon deleterious elements, degradation index (fine generation during handling), and how the ore behaves in the blast furnace

. Each producer's price is based upon these benchmark prices.

Prices

- European Bench Mark 1998 1999 2000 2001 2002 2003 2004 2005 CVRD Itabira Fines (US¢/dmtu- FOB) 29.7 27.0 28.1 29.3 29.1 31.71 37.63 64.54 CVRD Carajas Fines US¢/dmtu-FOB) 31.0 27.6 28.8 30.1 29.3 31.94 37.90 65.00 CVRDItabira/Cara'asPellets (US¢/dtntu-FOB) 53.6 46.5 49.9 52.4 50.4 54.93 63.60 118.57 Prices

- Japanese Bench Mark Mt Newman/Hamersle Lump US¢/dltu - FOB) 38.8 34.83 36.84 38.03 36.13 39.35 46.67 80.04 Mt Newman/Hamersle Fines US¢/dltu - FOB)_ 1 29.9 26.63 27.79 28.98 28.28 30.83 36.67 62.89 Source: IISI, Skillings, Roskill To add to the confusion, European prices are often quoted CIF, including customs/cost, insurance and freight to European ports, while Japan prices are quoted FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations of deleterious elements such as phosphorus, base metals, sulphur, alkalis, silica, alumina and titania oxide or for failing to meet physical specifications such as percentage of fines or ultrafines. The dmtu is ten kilograms (10 kg) of iron ore based upon a 1% Fe content. Calculating a price per tonne of shipped product can be confusing and comparison of iron ore sold on a per tonne basis requires significant assumptions to be made. Mt Newman lump grading 63% Fe with a 3% moisture content would sell for:

63% Fe times $0.8004 times 0.97 = $48.91 per long ton or $48.14 per tonne In comparison, a Carajas pellet with 66% Fe and 2% moisture would sell for:

66% Fe times $1.1857 times 0.98 = $77.92 per long ton or $76.69 per tonne This calculation assumes that the ore shipment meets normal negotiated contract specifications. Some of these specifications were for product standards set several years ago and some shipments incur penalties. Many steel mills accept certain deleterious elements to acquire a specific property in a iron ore product. The steel mills want consistency and predictability in iron ore products for their blast furnaces. Iron ore production is in three forms; pellets, lump and fines for sinter feed. Fines (-6.3mm) are used as sinter feed the most common burden for blast furnaces. Sinter is friable and cannot be transported far thus sinter plants are close to steel mills. Pellets are highly variable in their specific content, as individual steel mills will request the specific characteristics and composition required. Many mining operations have pelletising plants at the mine site or near its terminal port. Japanese steel mills have pelletising plants on-site, but will import pellets with very specific composition. There is no shortage of pelletising capacity worldwide. A number of plants have been mothballed and with increased demand may come back on-stream. Future demand for pellets is expected to be relatively flat with most of new future demand for fines and lump. The bench mark prices for lump have been historically set by RTHI or BHPBIO with the benchmark price for the Brockman lump being identical for both companies. Iron Ore Price Bench Mark Comparison



### 8 

# i I Iron Mines Corporation

Corporate Control ofIron Ore Production and Exports, 2004 (% ofworld total) Production Trade CVRD 14 32 Rio Tinto 8 19 BRP Billiton 7 15 Total 29 66 Source: UNCTAD Iron ore prices are set each year in complex negotiations byRTHI, BHPBIO or CVRD. These prices form the basis for prices received by other producers, based upon deleterious elements, degradation index (fine generation during handling), and howthe orebehaves in the blast furnace. Eachproducer'sprice is basedupon these benchmarkprices.

ron re nce enc ar 

### o P' B hM kCompanson Prices

- European BenchMark 1998 1999 2000 2001 2002 2003 2004 2005 CVRD ltabira Fines (US¢/dmtu

- FOB) 29.7 27.0 28.1 29.3 29.1 31.71 37.63 64.54 CVRD Carajas Fines (US¢/dmtu

- FOB) 31.0 27.6 28.8 30.1 29.3 31.94 37.90 65.00 CVRD ltabira/CarajasPellets (US¢/dmtu

- FOB) 53.6 46.5 49.9 52.4 50.4 54.93 63.60 118.57 Prices

- JapaneseBenchMark MtNewmaniHamersleyLump US¢/dltu

- FOB) 38.8 34.83 36.84 38.03 36.13 39.35 46.67 80.04 MtNewmaniHamersleyFinesUS¢/dltu

- FOB) 29.9 26.63 27.79 28.98 28.28 30.83 36.67 62.89 Source: lIS!, SkIllings, Rosklll To add to the confusion, European prices are often quoted CIF, including customs/cost, insurance and freight to European ports, while Japan prices are quoted FOB, free on board to the mine's terminal port. Penalties can be severe for high concentrations ofdeleterious elements such as phosphorus, base metals, sulphur, alkalis, silica, alumina and titania oxide or for failing tomeetphysical specifications such as percentage offines orultrafines. The dmtu is ten kilograms (10 kg) ofiron ore based upon a 1 % Fe content. Calculating a price per tonne ofshipped product can be confusing and comparison ofiron ore sold on a per tonne basis requires significant assumptions to be made. MtNewman lump grading 63% Fewith a 3% moisture contentwould sell for: 63% Fe times $0.8004 times 0.97 = $48.91 per longton or $48.14 pertonne In comparison, a Carajas pelletwith 66% Fe and 2% moisturewould sell for: 66% Fe times $1.1857 times 0.98 = $77.92 perlongtonor $76.69 pertonne This calculation assumes that the ore shipment meets normal negotiated contract specifications. Some of these specifications were for product standards set several years ago and some shipments incur penalties. Many steel mills accept certain deleterious elements to acquire a specific property in a iron ore product. The steel mills want consistency andpredictabilityin iron ore products for theirblastfurnaces. Iron ore production is in three forms; pellets, lump and fines for sinter feed. Fines (-6.3mm) are used as sinter feed the most common burden for blast furnaces. Sinter is friable and cannot be transported far thus sinter plants are close to steel mills. Pellets are highly variable in their specific content, as individual steel mills will request the specific characteristics and composition required. Many mining operations have pelletising plants at the mine site or near its terminal port. Japanese steel mills have pelletising plants on-site, but will importpellets with very specific composition. There is no shortage ofpelletising capacity worldwide. A number ofplants have been mothballed and with increased demand may come back on-stream. Fuhlre demand for pellets is expected to be relatively flat with most ofnew future demand for fines and lump. The bench mark prices for lump have been historically set by RTHI or BHPBIO with the benchmarkprice for the Brockmanlump being identical for both companies.



### 8Benchmark Lump_Sinter Prices Australia-Japan
90.00 - 80.00 70.00 60.00 50.00 40.00 - 30.00 - 20.00 10.00 0.000Q O'\ Oq' 00 Ot' Pb 00 OA 02 00 0c O Oq 00 OEx Oh 'C' NO' Ni NC NC N Nc NO N( ') 0



## Year sinter feed lump

Lump, simply defined, is naturally occurring `pellets' requiring simple crushing and screening before shipment. It must meet strict minimum chemical characteristics, generally 62+% Fe, as it is not processed and forms a direct charge to the blast furnace. More importantly it must meet specific physical characteristics. Once crushed to -31.5mm+6.3mm (-1'/4 inch +1/4 inch) in size, it must not degradate during handling. It is easier to handle, does not roll around in the furnace, as do pellets and is less polluting than fines or concentrate (dust) and easier to handle during transport. It commands a premium to fines (-6.3mm) and does not require the grinding and processing to form pellets. All blast furnaces use a variable combination of sinter, lump and/or pellets as input or direct charge. Individual blast furnaces are extremely variable in their direct charge composition. Generally, the US steel producers use 75+% pellets in their blast furnaces whiles the rest of the world uses sinter feed (60+%) as a dominant burden charge. The majority of blast furnaces increasingly blend and mix the types of ores used as direct charge to reduce swelling, increase throughput, reduce energy cost, reduce coke consumption and generally improve the steel making process while reducing pollution and environmental concerns. Although, specific charge mixes can vary dramatically, the average blast furnace mix is estimated as follows:

Region Lump Pellets Sinter USA 3% 75% 22% Europe 14% 17% 69% Japan 19% 16% 65% Source: Ullmans Importantly lump has a significant price advantage over pellets, being 50+% cheaper. It can be stockpiled and used as direct charge to increase output when demand is high. Pellets will breakdown if stored for lengthy periods. Sinter and pellet plants cannot incrementally increase production without significant capital outlays. Despite this advantage, there are strong views amongst the world's steel mills on cost and productivity advantages of the various blast furnace charges. There is an increasing demand for a new quality lump ore supply. Two of the main sources, the BHPBIO and RTHI's Brockman lump ores in the Pilbara of northwest Australia are being depleted. As mining depths increase, the ores are becoming softer and moisture content increases. Output is shifting to the Marra Mamba lump ores, but they are softer, have a lower lump content, are lower grade and contain approximately 10% moisture. This translates to an approximate Average Charge Mix in the Blast Furnace (1990's)

9 

# i 

# I Iron Mines Corporation

Benchmark Lump_Sinter Prices Australia-Japan


### 90.00 80.00 70.00 

### :c 60.00 

### .E ::l 

### 50.00 

# :a

... C1) 

### 40.00 a. .l!l c 

### 30.00 C1) 0 II) 

### 20.00 2- Q) 

### 10.00 (J 'i: Il. 

### 0.00


## Year --+- 

### sinterfeed lump

Lump, simply defined, is naturally occurring 'pellets' requiring simple crushing and screeningbefore shipment. Itmust meet strictminimum chemical characteristics, generally 62+% Fe, as it is notprocessed and forms a direct charge to the blast furnace. More importantly it must meet specific physical characteristics. Once crushed to -31.5mm+6.3mm (-1\4 inch+\4inch) in size, itmustnot degradate during handling. Itis easierto handle, does notroll around inthe furnace, as do pellets and is less polluting than fines or concentrate (dust) and easier to handle during transport. It commands a premium to fines (-6.3mm) and does not require the grinding and processing to form pellets. All blast furnaces use a variable combination of sinter, lump and/or pellets as input or direct charge. Individual blast furnaces are extremely variable in their direct charge composition. Generally, the US steel producers use 75+% pellets in their blast furnaces whiles the rest ofthe world uses sinter feed (60+%) as a dominant burden charge. The majority ofblast furnaces increasinglyblendand mix the types ofores used as direct chargeto reduce swelling, increasethroughput, reduce energy cost, reduce coke consumption and generally improve the steel making process while reducing pollution and environmental concerns. Although, specific charge mixes can vary dramatically, the average blast furnace mix is estimated as follows:
AverageCharge IX ID t e ast M' . h BI Furnace (1990' ) s Region Lump Pellets Sinter

USA 3% 75% 22% Europe 14% 17% 69% Japan 19% 16% 65% Source: Ullmans Importantly lump has a significant price advantage over pellets, being 50+% cheaper. It can be stockpiled and used as direct charge to increase output when demand is high. Pellets will breakdown ifstored for lengthyperiods. Sinter and pellet plants cannot incrementally increase production without significant capital outlays. Despite this advantage, there are strong views amongst the world's steel mills on cost and productivity advantages of the various blast furnace charges. There is an increasing demand for a new quality lump ore supply. Two ofthe main sources, the BHPBIO and RTHI's Brockman lump ores in the Pilbara ofnorthwest Australia are being depleted. As mining depths increase, the ores are becoming softer and moisture content increases. Output is shifting to the Marra Mamba lump ores, but they are softer, have a lower lump content, are lower grade and contain approximately 10% moisture. This translates to an approximate 910% loss in the value of each tonne of ore shipped as Marra Mamba replaces Brockman as the primary Australian source

of lump iron ore.

Source % Lump/Fines % Fe Comments Brockman, Australia 45/55 63.0 Major supply of lump for 35 years, limp being mixed with Marra Mamba ores Yandi, Australia 5/95 58.0 Primarily sinter feed Marra Mamba, Australia 35/65 60.5 Low P, softer ore, lower Fe levels Carajas, Brazil 5/95 65.5 Ore platy and subject to degradation Sishen, South Africa 60/40 66.0 High alkali ore, demerit in price, although penalty has been reduced for lump from 28% in 1992 to 14% in 1999. Fines demerit has remained constant at 20%. Source: Annual Reports, Skillings Since 1983 demand for lump has remained high while supply has been stagnant. In 1983 lump output totalled 107.5 million tonnes, representing 44.8% of the seaborne trade and 25% of total world iron ore supply. By 1999, lump output totalled just 77.1 million tonnes, representing just 19% of the seaborne trade and 7.6% of world output. The market has and will quickly absorb any new supply of lump at the expense of pellets and concentrate/sinter fines. Sinter plants cannot increase output in the short-term to deal with increased demand and pellets require expensive processing to produce. Production in 2004 remained strong total iron ore output increasing by 9.9% to 1,203 million tonnes. Exports also increase to 650 million tonnes, a rise of 12.3%. Chinese demand remained strong with imports of 208 million tonnes of iron ore. Domestic production is in excess of 120 million tonnes (normalised to 65% Fe) or 250 million tonnes (actual) of low grade and low quality iron ore. It is estimated that approximately 60 million tonnes of iron ore was imported into China on a spot basis in 2004. This explains the ubiquitous trading groups that have invaded virtually every mining convention. UNCTAD reports that unofficial iron ore production in China is 50 to 60 million tonnes of iron ore or approximately 25% of official production. This indicates that perhaps there is a considerable underestimation of the actual demand in China and the remainder of the world as a grey market has developed in iron ore trade. China has recently announced plans to establish "quotas" for imports of raw materials. These "quotas" are not restrictions on imports, but an attempt to establish more accurate import/export trade data that is currently no better than a guess. Steel companies and iron ore producers, both private and state controlled entities have been importing considerable amounts of raw materials and the government is attempting to more accurately estimate both imports of raw materials, but also accurately gauge output. It has been estimated that actual steel production in China may be underreported by as much as 10-20% (The Economist). Iron ore prices have increased by 9% in 2003, 18.6% in 2004 and an unprecedented 71.5% for 2005. These increases have not yet slowed demand for iron ore products in the short-term as virtually all iron ore production has been bought and steel mills, particularly the Chinese, have been scouring the world for new sources of quality iron ore. In addition, it is reported that several steel mills do not yet have contracts for all required inputs for 2005. North American steel mills are operating at capacity and shortages of iron ore, scrap steel and coking coal, all essential components in the steel making process, continue to be reported. Although, this shortage will be alleviated in the near future by increased production particularly in Brazil and Australia, the consolidation and dominance in control of the export trade has opened opportunities for future production of quality iron ores. Primary Sources of Seaborne Traded Lump Ore

10 

# i I Iron Mines Corporation 10% loss in the value ofeachtonne ofore shipped as MarraMambareplaces Brockman as theprimaryAustralian source oflump iron ore. p' nmary

## sources 0fS b ea orneT d dL ra e ump

## ore Source % Lump/Fines %Fe Comments Brockman, Australia 45/55 63.0 Major supply of lump for 35 years, limp being mixed with Marra Mamba ores Yandi, Australia 5/95 58.0 Primarily sinterfeed Marra Mamba, Australia 35/65 60.5 Low P, softer ore, lower Fe levels Carajas, Brazil 5/95 65.5 Ore platy and subjectto degradation Sishen, SouthAfrica 60/40 66.0 High alkali ore, demerit in price, although penaltY has been reduced for lump from 28% in 1992 to 14% in 1999. Fines demerit has remained constant at 20%. Source: Annual Reports, SkIllmgs Since 1983 demand for lump has remained high while supply has been stagnant. In 1983 lump output totalled 107.5 million tonnes, representing 44.8% ofthe seaborne trade and 25% oftotal world iron ore supply. By 1999, lump output totalledjust77.1 milliontonnes, representingjust 19% ofthe seaborne trade and 7.6% ofworld output. The market has and will quickly absorb any new supply oflump at the expense ofpellets and concentrate/sinter fines. Sinter plants cannot increase output in the short-term to deal with increased demand and pellets require expensive processing to produce. Production in 2004 remained strong total iron ore output increasing by 9.9% to 1,203 million tonnes. Exports also increase to 650 million tonnes, arise of 12.3%. Chinese demandremained strong with imports of208 million tonnes of iron ore. Domestic production is in excess of 120 million tonnes (normalised to 65% Fe) or250 million tonnes (actual) oflow grade and low quality iron ore. Itis estimatedthat approximately 60 milliontonnes ofiron ore was imported into China on a spot basis in 2004. This explains the ubiquitous trading groups that have invaded virtually every mining convention. UNCTAD reports that unofficial iron ore production in China is 50 to 60 million tonnes ofiron ore or approximately 25% ofofficial production. This indicates that perhaps there is a considerable underestimation ofthe actual demand in China andthe remainder ofthe world as a greymarkethas developed in iron ore trade. China has recently announced plans to establish "quotas" for imports of raw materials. These "quotas" are not restrictions on imports, but an attemptto establish more accurate import/export trade data that is currentlyno better than a guess. Steel companies and iron ore producers, both private and state controlled entities have been importing considerable amounts ofraw materials and the government is attempting to more accurately estimate both imports of raw materials, but also accurately gauge output. It has been estimated that actual steel production in China may be underreportedbyas much as 10-20% (The Economist). Iron ore prices have increased by 9% in 2003, 18.6% in 2004 and an unprecedented 71.5% for 2005. These increases have not yet slowed demand for iron ore products in the short-term as virtually all iron ore production has beenbought and steel mills, particularlythe Chinese, havebeen scouringthe worldfor new sources ofqualityiron ore. In addition, it is reported that several steel mills do notyet have contracts for all required inputs for 2005. North American steel mills are operating at capacity and shortages ofiron ore, scrap steel and coking coal, all essential components in the steel making process, continue to be reported. Although, this shortage will be alleviated in the near future by increased production particularly in Brazil and Australia, the consolidation and dominance in control ofthe export trade has opened opportunities for future production ofqualityiron ores.



### 10rcm tv1 Tics Corpcrcilit n

GLOSSARY Blast Furnace A furnace for the smelting of pig iron from iron oxides; combustion is intensified by a blast of air and/or other inert gases Beneficiation

CIF The process of separating, concentrating and classifying ore by particle size and or some other characteristic (e.g. specific gravity, magnetic susceptibility, surface chemistry, etc.) in order to obtain the mineral or metal of interest. Cost/customs, insurance and freight. Price of a bulk commodity delivered to a customer's terminal port. Price includes shipping cost and is the common quoted price to bulk commodities sold in Europe. Also known as C&F. Concentrate Very fine grained (less than 0.15 mm or 150 μm) particles of iron ore (ultrafines) generated by mining, grinding, handling and transporting of iron ore, with no practical direct application in the steel industry, unless the material is aggregated into pellets through an agglomeration process. In many iron ore deposit, it is necessary to grind the mineralization finely to liberate the iron minerals. DRI Direct Reduced Iron. Process that converts iron ore into DRI or HBI using natural gas or coking coal without melting. DRI or HBI by-pass the blast furnace stage in the steel making process.
DWT

Fe Unit Deadweight tonnes. The measurement unit of a vessel's capacity for cargo, fuel, oil, stores and crew, measured in tonnes or 1,000 kilograms. A vessel's total deadweight is the total weight that the vessel can carry when loaded to a particular load line. A measure of the iron content in the iron ore that is equivalent to 1% iron content in 1 tonne or iron ore. The two most commonly used units are the dry long tonne unit (dltu) or 22.4 pounds and dry metric tonne unit (dmtu) or 10 kilograms (22.046 pounds). The dry measure discounts the internal moisture of the iron ore being shipped. Fines(Sinter Feed) Refers to iron ore with particles in the range of 0.15 mm and 6.3 mm in diameter. Suitable for sintering. FOB

Hematite

HBI Free on board. Price of a bulk commodity delivered to producer's terminal port. Price excludes shipping and is the common quoted price to bulk commodities sold in Asia. An iron oxide mineral whose composition is Fe203 and stoicheiometric maximum iron content is 69.94% iron (Fe). Hot Briquetted Iron. Direct reduced iron that has been processed into briquettes. Instead of using a blast furnace, the oxygen is removed from the ore using natural gas and results in a substance that is 90-92% iron. Because DRI (direct reduced iron) may spontaneously combust during transport, HBI is preferred when the metallic mineral must be stored or moved. Long Ton A unit of measure in bulk commodities equivalent to 2,240 pounds. Long Tonne Unit

Lump A unit of measurement used in the iron ore industry for the sale of iron ore. It is equal to I% iron content in a long ton of ore or 22.4 pounds. Quoted a dry long ton unit (dltu). Iron ore with the coarsest particle size in the range of 6.3 mm and 50 mm, with the preferred range between 6.3 mm and 31.5 mm. Magnetite An iron oxide mineral whose composition is Fe304 and stoicheiometric maximum iron content is 72.36% iron (Fe). Mineral Deposit An identified in-situ mineral occurrence from which valuable or useful minerals may be received. Mineral deposit estimates are not precise calculations, being dependent on the interpretation of limited information on the location, shape and continuity of the occurrence of mineralization and on the available sampling results.

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# i I Iron [\/lines Corporation GLOSSARY
Blast Furnace

Beneficiation

CIF

Concentrate

DR!

DWT

FeUnit

Fines(Sinter Feed) FOB

Hematite

HBI

LongTon Long Tonne Unit
Lump
Magnetite

Mineral Deposit A furnace for the smelting ofpig iron from iron oxides; combustion is intensified by a blast ofair and/or otherinert gases The process of separating, concentrating and classifying ore by particle size and or some other characteristic (e.g. specific gravity, magnetic susceptibility, surface chemistry, etc.) in order to obtain the mineral ormetal ofinterest. Cost/customs, insurance and freight. Price ofa bulk commodity delivered to a customer's terminal port. Price includes shipping cost and is the common quoted price to bulk commodities sold in Europe. Also known as C&F. Very fine grained (less than 0.15 mm or ISO f.lm) particles ofiron ore (ultrafines) generated by mining, grinding, handling and transporting ofiron ore, with no practical direct application in the steel industry, unless the material is aggregated into pellets through an agglomeration process. In many iron ore deposit, it is necessary to grind the mineralization finely to liberate the iron minerals. DirectReduced Iron. Process that converts iron ore into DRI orHBI using natural gas orcoking coal withoutmelting. DRI orHBI by-pass the blast furnace stage in the steel makingprocess. Deadweight tonnes. The measurement unit of a vessel's capacity for cargo, fuel, oil, stores and crew, measured in tonnes or 1,000 kilograms. A vessel's total deadweight is the total weight that the vessel can carrywhen loaded to aparticularload line. A measure ofthe iron content in the iron are that is equivalent to 1 % iron content in 1tonne or iron ore. The two most commonly used units are the dry long tonne unit (dltu) or 22.4pounds and dry metric tonne unit (dmtu) or 10 kilograms (22.046 pounds). The dry measure discounts the internal moisture ofthe iron ore being shipped. Refers to iron ore with particles in the range of0.15 mm and 6.3 rnm in diameter. Suitable for sintering. Free on board. Price ofabulk commodity delivered to producer's terminal port. Price excludes shipping and is the common quotedprice to bulk commodities sold in Asia. An iron oxide mineral whose composition is Fe203 and stoicheiometric maximum iron content is 69.94% iron (Fe). Hot Briquetted Iron. Directreduced iron that has been processed into briquettes. Instead ofusing ablast furnace, the oxygen is removed from the ore using natural gas and results in a substance that is 90-92% iron. Because DRI (direct reduced iron) may spontaneously combust during transport, HBI is preferred when the metallic mineral must be stored or moved. A unit ofmeasure in bulk commodities equivalentto 2,240 pounds. A unit ofmeasurement used in the iron ore industry for the sale ofiron ore. Itis equal to 1 % iron content in a longton ofore or 22.4 pounds. Quoted a dry long ton unit (dltu). Iron ore with the coarsest particle size in the range of 6.3 mm and 50 mm, with the preferred range between 6.3 mm and 31.5 mm. An iron oxide mineral whose composition is Fe304 and stoicheiometric maximum iron content is 72.36% iron (Fe). An identifiedin-situ mineral occurrence from which valuable oruseful minerals maybereceived. Mineral deposit estimates are not precise calculations, being dependent on the interpretation oflimited infonnation on the location, shape and continuity ofthe occurrence ofmineralization and on the available sampling results.

11Mineral Reserve

Mineral Resource

Ore

Pellet Feed (ultra-fines)

Pellets

Pig Iron Reducibility
Seaborne Market
Sinter Feed (Fines) Sintering Specularite

Ton Tonne Ultra-fines That part of a measured mineral resource or indicated mineral resource which can be extracted legally and at a profit under economic conditions that are specified and generally accepted as reasonable by the mining industry and which is demonstrated by a scoping study or feasibility study. Under CIM Standards, a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth's crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources fall under the following categories: measured mineral resource; indicated mineral resource; and inferred mineral resource. The concentration of metals and their chemical compounds within a body of rock that can be exploited profitably under current economic conditions. Very fine grained (less than 0.15 mm or 150 μm) particles of iron ore generated by mining, grinding, handling and transporting of iron ore, with no practical direct application in the steel industry, unless the material is aggregated into pellets through an agglomeration process Agglomerated ultra-fine iron ore particles of a size and quality suitable for particular steel making processes. Pellets generally range from 8 mm to 18 mm in size with the preferred size between 12.5 mm and 15 mm. Melted iron produced in the blast furnace The reduction of iron oxide to eventual pig iron through the liberation of oxygen. Comprises the total iron ore trade (imports and exports) between countries using ocean bulk vessels. Refers to iron ore with particles in the range of 0.15 mm and 6.3 mm in diameter. Suitable for sintering. Refers to the agglomeration of small particles into a coherent mass by heating without melting. A variety ofhematite characterized by aggregates of silvery, metallic, specular hematite flakes or tabular, anhedral crystals. Also referred to as specular hematite. Short ton (2,000 pounds). A unit of measure equal to 1,000 kilograms or approximately 2,204.6 pounds Very fine grained (less than 0. 15 mm or 150 gm) particles of iron ore generated by mining, grinding, handling and transporting of iron ore, with no practical direct application in the steel industry, unless the material is aggregated into pellets through an agglomeration process. In many iron ore deposit, it is necessary to grind the mineralization finely to liberate the iron minerals. Also referred to as concentrate.

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# i 

# I Iron Mines Corporation MineralReserve That part ofameasured mineral resource or indicated mineral resource which canbe extracted legally and at a profit under economic conditions that are specified and generally accepted as reasonable by the mining industry andwhich is demonstratedby a scoping study or feasibility study.
MineralResource Under ClM Standards, a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth's cmst in such fonn and quantity and of such a grade or quality that it has reasonableprospects for economic extraction. The location, quantity, grade, geological characteristics and continuity ofa Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources fall under the following categories: measured mineral resource; indicated mineral resource; and inferred mineral resource. Ore The concentration ofmetals and their chemical compounds within abody ofrock that can be exploited profitably under current economic conditions. PelletFeed (ultra-fines) Very fine grained (less than 0.15 mm or 150 /lm) particles ofiron ore generatedby mining, grinding, handling and transporting ofiron ore, with no practical direct application in the steel industry, unless the material is aggregated into pellets through an agglomeration process Pellets Agglomeratedultra-fine iron ore particles ofa size and quality suitable for particular steelmaking processes. Pellets generallyrange from 8mm to 18 mm in size with the preferred size between 12.5 mm and 15 mm. Pig Iron Melted iron producedin the blastfurnace Reducibility Thereduction ofiron oxide to eventual pig iron through the liberation ofoxygen. Seaborne Market Comprises the total iron ore trade (imports andexports) between countries using ocean bulk vessels. SinterFeed (Fines) Refers to iron ore with particles in the range of0.15 mm and 6.3 mm in diameter. Suitable for sintering. Sintering Refers to the agglomeration ofsmall particles into a coherentmass by heating without melting. Specuiarite A variety ofhematite characterizedby aggregates ofsilvery, metallic, specularhematite flakes ortabular, anhedral crystals. Also referred to as specularhematite.
Ton Shortton (2,000 pounds). Tonne Aunit ofmeasure equal to 1,000 kilograms orapproximately 2,204.6 pounds Ultra-fines Very fine grained (less than 0.15 mm or 150 /lm) particles ofiron ore generatedby mining, grinding, handling and transporting ofiron ore, with no practical direct application in the steel industry, unless the material is aggregatedintopellets through an agglomerationprocess. In many iron ore deposit, it is necessaryto grind the mineralization finely to liberate the iron minerals. Also referredto as concentrate.



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