7/13/2010 by Beth Bily

PHOTO: Magnetation's Rev 3 Sepaprator went online in April. The new technology produces more concentrates with less down time.

It was about three to four months after Magnetation began Keewatin operations in February 2009 that its key leaders realized the technology in place wasn’t going to work.

That technology, the ferrous wheel, was designed by Grand Rapids innovator and retired engineer Alan Fritz. It separates the only slightly magnetic hematite from waste rock found in natural ore tailings basins that dot the landscape of Minnesota’s Mesabi Iron Range. Natural ore tailings basins are remnants of an earlier era in mining that ended in the 1950s.

The hematite extraction process was to revolutionize iron mining – lifting out hematite and creating a 65 percent iron concentrate that could be used in steelmaking and numerous other industrial applications. Fritz’s technology worked, but there were significant limitations.

Larry Lehtinen, CEO and majority owner of Magnetation, said the ferrous wheel was capable of producing less than five tons of iron ore concentrate per hour. Moreover, they couldn’t keep the technology up and running.

In an industry with high overhead, producing more tonnage with greater reliability is vital. That led to the development of new technology, the Rev3 Separator, which went online April 21 of this year. Although the Rev3, like the ferrous wheel, separates hematite from waste rock, Lehtinen said his new patent-pending technology uses a completely different configuration.

The Rev3 produces between 20 to 25 tons of concentrate per hour, and it’s higher quality, said Lehtinen. Development of the new technology was a calculated, nearly $3 million risk, and one that kept Magnetation alive, according to its CEO.

“If we hadn’t made the risky investment in the Rev3, we would have been a statistic, we wouldn’t have made it,” he said.

Less than ideal operations in those early months led to unanticipated down time. That, coupled with lower iron ore prices, led to cash flow issues in the company’s first year of operation.

“We were living with a one-third reduction in ore prices,” Lehtinen said.

Now, Rev3’s greater capacity has paved the way for new customers and expansion. Magnetation signed a seven-year deal with Mexico-based Alto Hornos de Mexico (AHMSA), the country’s largest steel manufacturer with 4.2 million metric tons of capacity. The $400 million deal includes a one-year build out followed by six years of supply.

To meet the increased demand, company executives plan a second Magnetation plant at a nearby Taconite, MN location.

The expansion project would greatly increase the company’s capacity. Plant 2 alone will have 650,000 to 800,000 tons of annual capacity bringing total annual operational output to 1.1 million tons. Magnetation currently employs 38 FTEs. The expansion would allow the company to add 50 new employees.

Mike Troumbly, mayor of Taconite, said he initially wasn’t supportive of the project coming to his town, but was won over after learning more about the company, what it does and how it operates.

“We welcome the jobs,” he said. “There are a lot of unemployed people” in Itasca County.

Still, he has heard from residents who are concerned about the dust Magnetation will generate.

Lehtinen said that tight finances last year resulted in buying a smaller capacity water truck. When revenues improve, a larger truck will greatly reduce the dust problem at its Keewatin plant as well as future mining sites, he said.

Magnetation is a scram mining operation, or an operation on already-mined land. Because the land already is disturbed, there is a relatively short permitting process. Lehtinen anticipates permitting will be completed by September and site preparation could begin as early as November. If current timelines hold, Plant 2 would be up and running by October 2011. The expansion carries an estimate cost of $65 million, which will be funded through an undisclosed combination of debt and equity.

Cash flow will improve thanks to action by the state of Minnesota. In June, the Iron Range Resources Board voted to subordinate its position on collateral on an outstanding $5.5 million balance in Magnetation loans. That move will allow financing of a $5 million line of credit from JP Morgan Chase. It allows Magnetation to reduce accounts payable, pay off a short-term bank loan and fund expansion expenses. Lehtinen told the IRR Board that his company had “learned its lesson” on shoestring capitalization.

With the expansion, the company projects revenues will increase from an estimated $9 million this year to $27 million in 2011 and $100 million by 2012. Revenues will also increase in 2011 due to higher ore prices. The world’s largest ore manufacturers threw out a long-standing tradition this year of pricing iron ore contracts on a 12-month basis. Instead, prices are determined on a quarterly basis using average three-month spot prices. The current quarterly price is approximately $136 per ton.

With an estimated 54 million tons of concentrate equivalent in the old tailings basins on the Mesabi Iron Range, there’s potential big company as well as revenue growth. The CEO is planning for 280 percent annual growth at his young mining company with as many as six plants in its future.

“We made it through (a tough first year) and we’re growing at light speed,” he said.

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