mine and, Cliffs applies a portion of the royalty payments directly to the lessor.
Historically, iron ore benchmark prices were determined in the first quarter of 2015, commenced proceedings under the calendar year through negotiations betweenCompanies' Creditors Arrangement Act (Canada), referred to as “CCAA”, with respect to its Canadian operations, including the major producers and their most significant customers. These prices were then generally adopted by the other suppliers when published.
A shiftsubsidiary that holds a majority interest in the marketplace has, among other things, made obsolete certain of the world iron ore pellet pricing methodology for calculating the royalty rate due to us contained in our sub-lease for theits Wabush iron mine. As a result of these market changes, and as the sub-lease permits us to renegotiate an increase in the royalty rates when the mine achieves certain profitability thresholds, which we believe have been obtained, we served the mine operator with notice of arbitration respecting our entitlement to a new base rate for the royalty and a determination for the calculation of future royalty pricing. We have also provided the mine operator with a notice of arbitration seeking recovery for royalty underpayments in 2010. The outcome of such proceedings cannot be determined at this time.
Iron ore is typically sold either as a concentrate, whereby the iron ore is in granular form, or as a pellet, whereby iron ore concentrate has been mixed with a binding agent, formed into a pellet and then fired in a furnace. Iron ore pellets can be charged directly into blast furnaces without further processing and are primarily used to produce pig iron which is subsequently transformed into steel.
The following table sets forth historical total iron ore shipments (which include pellets, chips and concentrates) and royalty payments to us based upon the amounts reported to us byjoint venture. While the Wabush mine operator:
| | | | | | | | | | | | | | | | Gross |
| | | | | | | | | | | | | | | Average |
| | | | | | | | | | | Total | | Gross | | Royalty |
| | | Tonnage Shipped | | Tonnage | | Royalties | | Rate/Ton |
| Year | | Q1 | | Q2 | | Q3 | | Q4 | | Shipped | | Received(1) | | Received |
| | | (In thousands, other than the Royalty Rate) |
| 2009 | | 402 | | 386 | | 1,202 | | 1,198 | | 3,188 | | C$ 17,350 | | | C$5.44 |
| 2010 | | 874 | | 941 | | 832 | | 1,105 | | 3,752 | | 22,915 | (2) | | 6.11 |
| 2011 | | 719 | | 796 | | 1,311 | | 646 | | 3,472 | | 31,607 | | | 9.10 |
| | 2012 | | 482 | | 911 | | 945 | | 851 | | 3,189 | | 31,191 | | | 9.78 |
| 2013 | | 393 | | 465 | | 1,177 | | 805 | | 2,840 | | 26,555 | | | 9.35 |
____________________(1) | | Subject to a 20% resource property revenue tax. |
| | |
(2) | | Does not include the amount of arbitration award. |
In 2013,is not directly a party to the CCAA proceedings, Cliffs announcedhas publicly disclosed that it idledmay be included in any sales process.
Pursuant to the Pointe Noire pellet plantsub-lease, we are entitled to minimum lease payments of C$3.25 million per year until termination thereof. If Cliffs terminates the sub-lease, we intend to exercise our step-in rights and transitioned to producing an iron ore concentrate only product fromacquire the mine dueproperty pursuant to high production coststhe terms thereof. In such event, under the terms of the sub-lease, we can elect to purchase certain infrastructure onsite at a then reasonable market price. There can be no assurance as to when and lower pellet premium pricing. Subsequentif the operator will provide notice of such termination. We are currently exploring opportunities for this asset with stakeholders and third parties. Please see Note 15 to our audited consolidated financial statements for the year ended December 31, 2013, Cliffs announced2014 for further information.
Investors are cautioned that it would idlewe have not completed any technical reports, including reserve or resource estimates under Canadian National Instrument 43-101, referred to as “NI 43-101”, with respect to the Wabush mine bymine. No final production decision has been made regarding the end ofproject in the first quarter of 2014. While Cliffs has not announced a complete shutdown or closure ofevent we re-take the mine at this time there can be no assurance that mining operationsproperty and any such decision will be restarted by Cliffs or a third party.based on studies demonstrating economic and technical viability.
A minimum royalty payment of C$3.25 million per year continues to be payable while the mine is idled until the expiry in 2055 of the mining sub-lease underlying the Company’s royalty interest in the mine, unless earlier terminated by the parties in accordance with its terms.
We hold a 50% interest in the Pea Ridge Iron Ore Mine, located near Sullivan, Missouri, U.S.A., approximately 70 miles southwest of St. Louis, Missouri, U.S.A. The mill wasU.S.A, which has not operated as an underground mine between 1963 and 2001 and was originally developed as a partnership between Bethlehem Steel Corporation and St. Joe Minerals Corp., operating as the Meramec Mining Company. From 1981 to 1987 the mine was operated by Fluor Corporation and was subsequently acquired by Woodridge Resources Corporation until its closure insince 2001. From 2001 until we acquired our interest in the Pea Ridge Mine, operations had been limited to the reclamation of resource settlement ponds located below the historical production facilities. Historical data and records indicate that approximately 58.5 million short tons of iron ore were removed from the mine between 1963 and 2001.
The Pea Ridge Mine includes the historic mine deposit along with a large tonnage of tailings material. Prior infrastructure remains in place, including access to underground workings, two vertical mine shafts with hoists and headframes, a plant building and tailings and settling ponds. The mine’s location is served by highways connecting to the U.S. interstate highway system and has a presently unused rail spur line connecting to the Union Pacific railway system.
During 2013, together with our partner, we are studying processing the tailings at, and re-opening, the Pea Ridge Mine. In the second quarter of 2012, we completed an updated independent NI 43-101 compliant technical report, referred to as the “Pea Ridge Technical Report”, upgrading previously disclosed historic resources estimates. We are currently conducting additional analysis and investigations in respect of the project. In 2014 and 2013, we invested $0.9 million and $2.0 million of capital, respectively, to current resource estimates. Behre Dolbear and Company (USA), Inc., referred to as “Behre Dolbear”, our independent technical consultants, authoredprogress the Pea Ridge Technical Report. The estimates include anin situ (originally present) measured and indicated resource of 248.7 million short tons at 52.87% magnetic iron and 57.82% total iron and an inferred resource of 15.8 million short tons at 53.67% magnetic iron and 57.64% total iron based on a cut-off grade of 40% magnetic iron.project.
In completing the Pea Ridge Technical Report, Behre Dolbear conducted, among other things, an audit of historic drill hole data and a confirmatory re-sampling and analysis program on the extensive library of drill core maintained at the Pea Ridge Mine site.
Readers should refer to the full text of the Pea Ridge Technical Report, titled “Technical Report on the PRR Mining Pea Ridge Property” dated August 13, 2012, for further information regarding the Pea Ridge Mine, a copy of which is available under our profile at www.sedar.com. The report was co-authored by Betty L. Gibbs, MMSA, and Derek Rance, P. Eng, of Behre Dolbear and Company (USA), Inc., both of whom wereare “qualified persons” and “independent” of our company, as such terms are defined in NI 43-101, as at August 13, 2012.43-101.
In addition to completion of the Pea Ridge Technical Report, as part of the work necessary to evaluate the re-opening of the mine, we engaged consulting firms to investigate the depthTrade finance and shape of the topservices
Our trade finance and bottom of the subsidence cave zone which is present above the mine deposit. This work included direct measurements of the size and extent of the cave zone within existing vertical drill holes above a portion of the Pea Ridge Mine deposit. Having received the results of such investigation, we are, together with our consultants, considering additional steps in the evaluation of the cave zone. We believe that the results of this work will be useful in determining the best way to develop the project. Additionally, in 2012 we commenced exploration and development work in connection with the large tonnage of tailings materials of the Pea Ridge Mine site.
A necessary step in completing further analysis, including feasibility studies, is dewatering the existing underground mine workings and completing additional analysis and investigations in respect of the project. In the years ended December 31, 2013 and 2012, we invested an additional $2.0 million and $5.0 million of capital, respectively, to progress the project.
In the third quarter of 2012, our commodities activities expanded to the energy sector. These activities include the development, production and processing of natural gas, NGLs and, to a far lesser degree, crude oil in Canada. The majority of such operations are located in the central fairway of the Western Canada Sedimentary Basin, primarily situated in the Province of Alberta. For further information regarding our natural gas and oil facilities, please see “Item 4: Information on the Company — D. Property, Plants and Equipment – Natural Gas Interests”.
In October 2013, we exercised our option under the term financing arrangements to acquire all the outstanding units of the Mazeppa Processing Partnership, referred to as “MPP”, which owns the Mazeppa Processing Facility in Alberta, Canada.
In November 2013, we entered into an agreement, referred to as the “Participation Agreement”, with an established oil and gas operator. Pursuant to the Participation Agreement, the third-party operator has committed to spending a minimum of C$50.0 million to drill a total of 12 net wells over an initial three-year term, with such drilling being primarily focused on our undeveloped oil and gas properties located in the Niton area of Alberta, Canada. Under the terms of the Agreement, the third-party operator will pay 100% of the costs required to drill and complete each well. If any of the initial 12 wells achieves continuous production, we may elect to: (i) participate for up to a 30% interest in the well by reimbursing the operator 25% of the costs of such well; or (ii) receive a 10% gross royalty on production. Additionally, any gas produced from a large proportion of these wells will be processed exclusively by our existing processing facility in the area. We believe that the transactions contemplated by the Participation Agreement provide us with the opportunity to further our undeveloped properties at minimal investment risk and, at the same time, provide a potential source of revenue expansion through royalty and processing arrangements. The operator commenced its program under the Participation Agreement in January 2014 by spudding an initial farm-out well, which is currently being completed. We currently expect that an additional four wells will be drilled in 2014 pursuant to the Participation Agreement.
Merchant Banking
Our merchant bankingservices operations include merchant banking and financial services, third-party financing and other services, proprietary investing and our real property.
We seekutilize our established relationships with international financial institutions, insurers and factoring companies to investprovide flexible, customized financial tools, extensive credit and risk management and structured solutions for our customers. Working closely with our customers, our professional staff arranges support for hedging and marketing of materials, financing and risk management solutions.
Our trade finance and services activities also include leveraging our marketing and financial experience and relationships to provide marketing services and trade finance services to our customers.
Our trade finance and services business generates revenues in many industries, emphasizing those business opportunities where the perceived intrinsic value is not properly recognized.form of corporate and trade finance service fees and interest income. We also realize gains from time to time on our proprietary investments, upon their sale, the execution of an equity or debt restructuring or the completion of other forms of divestment.
We use our financial and management expertise to add or unlock value within a relatively short time period.timeframe. Our merchant bankingtrade finance and services activity is generally not passive and we seek investments where our financial expertise and management can add or unlock value. Proprietary investments are generated and made as part of our overall merchant bankingtrade finance activities and are realized upon over time, sometimes taking more than one year. In addition, as part of our overall strategy, we often seek to acquire interests or establish relationships with commodity producers to realize upon potential synergies. Such interests can be acquired through purchases of, or investments in, commodity producers, or through contractual arrangements with them, including off-take agreements. The investments we make in commodity producers are part of our merchant banking strategy. To a degree, our merchant bankingtrade finance and commoditiesservices and resourcesglobal supply chain businesses supplement each other, which results in synergies in our overall business activities.
Our activities include making proprietary investments through investingusing our own capital and utilizing our expertise to capture investment opportunities. We seek to investparticipate in businesses or assets whosemany industries, emphasizing those business opportunities where the perceived intrinsic value is not properly reflected in their share or other price.recognized. Often such investments are in companies or assets that are under financial, legal or regulatory distress and our services include resolving such distress. Our investing takesThese activities take many forms and can include acquiring entire businesses or portions thereof, investing in equity or investing in the existing indebtedness (secured and unsecured) of a business or in new equity or debt issues. Our investing is
Such activities are generally not passive and we invest where we believe our expertise in financial restructuring and management and
