The next iron rush (pg. 2)

But the company's iron rush comes amid tough times in the industry. Mines around the world are shutting down as the recession cuts steel demand, and across the Range many taconite mines have fallen silent, their workers on indefinite furlough. Although the likes of China and India have announced economic stimulus packages that will surely increase demand for iron and steel, the downward pressure on prices is severe. "Everybody knows that prices must fall this year," says analyst Jim Lennon at Australian bank Macquarie.

How far is difficult to predict and beyond the control of all but the largest producers, which get together each year with the big consumers - notably China - to agree on a benchmark contract price. Prices have increased some 500% since 2003, and the Chinese are looking for a hefty rollback. Spot prices, now some 35% below the original contract, are one indicator of where prices could be heading. But industry experts point out that lower prices push China's marginal low-grade mines out of business, thus upping reliance on imports. With the outlook as clear as slurry, the industry's best guess is that the contract price will fall back to around $65 per metric ton, from $90 per metric ton today.

If that's the case, it will be pay-dirt time for Magnetation. Industry insiders familiar with the process reckon that the company's production costs could be as low as $15 per metric ton - roughly the same rate as Vale's - so even with falling prices and various state taxes and royalty payments totaling around $8 per metric ton, Magnetation should be able to achieve margins that would have amazed the Range's early millionaires. Not surprisingly, iron and steel companies that once dismissed Magnetation as an annoyance akin to Minnesota's summer mosquitoes are now paying attention.

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At the Keewatin plant, however, the possibility of a buyout seems worlds away. Under the gigantic inflatable dome, the focus is still on fine-tuning the production line. At the start of the process the tailings are screened to get rid of tree roots and other debris before being mixed with water from a nearby pond to create a porridge-like slurry. This goo then passes through various processes - thickening to concentrate the hematite and desliming to eliminate silica - before the magnets separate the hematite from the mush. Key equipment for the $10 million plant was salvaged from a mining-machinery graveyard in the town of Taconite - including the deslimer, which came with a large birch tree growing through it.

"Many thought I was insane to get involved," says Lehtinen of the business. "I'm from a big-steel background. This is small scale." But Lehtinen saw the vast potential and joined the team last year. "The craziest thing," he now concedes, was starting up as the harsh Minnesota winter was beginning. "We considered waiting until the spring, but we just decided to jump in whole hog and go for it."

As the concentrate emerges from the plant, it is trucked up the road to Magnetation's first customer, the soon-to-be-completed Mesabi Nugget plant at nearby Hoyt Lakes, where Lehtinen was a partner before joining Magnetation last year. A $270 million joint venture between Indiana-based Steel Dynamics (STLD, Fortune 500) and Japan's Kobe Steel, Mesabi aims to produce 500,000 metric tons of iron nuggets a year and is currently contracted to take 110,000 metric tons of concentrate - a processed, highly ferrous, and easy-to-ship form of ore - from Magnetation.

Nuggets fetch roughly five times more per metric ton than concentrate and can be fed directly into the electric arc furnaces of the mini-mills that dominate steelmaking. Specialty steels are even more lucrative. Indeed, Magnetation's management has signaled that it eventually wants to move up the supply chain: Lehtinen's latest recruit, David Chappie, 44, has experience producing high-value special steels for the likes of the aerospace industry. Says Chappie: "Concentrate is just the beginning. It will enable us to get into the lucrative stuff."

But for the moment the focus is on concentrate, and Magnetation has a plan for a second plant not far from the Keewatin site to boost capacity to around 750,000 metric tons a year. Down the road, multiple plants are envisaged, and although Magnetation has no suitors at the moment, the company is willing to lease its technology or enter into joint ventures to exploit tailings elsewhere in the U.S. or around the world. Says Hunt: "There are plenty of places like the Range where Magnetation can recover iron, or where it can improve yields from low-grade deposits."

Lehtinen is the first to admit that expansion plans will count for nothing if global recession means there are no customers out there. But he's confident the market for iron ore is not about to dry up, because there is no substitute for steel, or for its precursor, iron. "Even assuming moderate increases in living standards around the globe," says Lehtinen, "steel consumption will almost double by the year 2029." By then, Lehtinen points out, India alone will have a population of 1.5 billion and, factoring in a rise in living standards, per capita steel consumption, currently 40 kilograms, could increase tenfold.

Just in case steel remains in the doldrums, Lehtinen is lining up other customers, including the brewers of neighboring Milwaukee, who use hematite to put the brown coloring into the glass for their beer bottles. And concentrate has other uses, notably in the construction business, where it can serve as a weighting agent for foundations, and in the oil industry, where it is needed for some drilling operations.

Mindful that the magnetation process produces its own tailings, the company plans to landscape and plant this waste to create wetlands. This nature preserve, the idea of co-founder Hunt, will not only burnish Magnetation's environmental credentials but also make good money. "Wetland-mitigation credits currently sell for around $25,000 an acre," says Hunt. "So as well as extracting iron, we can turn wasteland into wetland - it's a win-win proposition."

None of the iron men are about to call in rich just yet. They know the Range has a way of raising and dashing hopes. Last year Indian steel giant Essar announced plans to build North America's first mine-based steel plant on the Range, and though construction work has begun on the $1.6 billion project, its future remains uncertain. An ambitious plan by minerals group PolyMet (PLM) to extract copper, nickel, and precious metals from the Range is drawing fire from environmental groups that fear water pollution.

Still, some cautious plans are being made by the men from Magnetation. The technique's inventor, Fritz, whose wife is battling cancer, wants to set up a fund to help cancer victims. Hunt is hoping that one of these days he'll get to own his house outright again. Meanwhile, Hammerlund's trucks are lining up outside the Keewatin plant to be loaded with concentrate for Mesabi Nugget. Magnetation is coming. And just maybe: There will be mud!  

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