Source: Iron Ore Co. of Canada

Having tried and failed to unload its Canadian iron ore assets last year, Rio Tinto (NYSE:RIO) may find bidders valuing them more highly after the Quebec government recently agreed to spend up to $20 million for a feasibility study on a new railroad in the Labrador Trough region that would connect the area's iron ore mines to ports for access to global markets.

Canada isn't much of a player in the global iron ore trade, but development of the Labrador Trough in northern Quebec could change that. The government has long eyed investment there to further develop the region's potential: Plan Nord, a massive 25-year, $80 billion infrastructure and mining development project to tap into the region's resource that was first unveiled in 2011, is making a comeback. The new feasibility study is but a small part of the overall target. 

The Iron Ore Company of Canada, or IOC, is Canada's largest iron ore producer and a leading global supplier of iron ore pellets and concentrate, producing 9 million tonnes in 2013 and sales 46% higher than the year before. Rio Tinto is its majority owner, with Mitsubishi owning a quarter and Labrador Iron Ore Royalty taking the remaining 15%. That stake also gives it part ownership of a railroad, the Quebec North Shore and Labrador Railway, and a deepwater port in Sept-Iles in northern Quebec -- the largest iron ore port in North America. While all this makes IOC an integrated operation, it has also made unloading it difficult for Rio Tinto. 

Port at Sept-Iles. Source: Iron Ore Co. of Canada

Equally problematic has been the collapse of iron ore pricing, which is down 30% for the year and tumbled 20% in the last month alone before recovering a few percentage points last week. The slide has taken its toll on the industry, which has shelved numerous development projects.

Cliffs Natural Resources (NYSE:CLF) announced last week it would slash another $100 million from its capital spending program , on top of the $460 million in reductions it previously declared, and in February suspended expansion at its Bloom Lake iron ore project. And BHP Billiton (NYSE:BHP), which has played a role in pricing because it has kept production humming along on hopes of higher demand from China, recently said its policy may have allowed its iron ore business to expand too rapidly while ignoring the impact the growth had of the rest of the company's operations.

BHP, however, says despite its slowing economy, China's steel output will rise to 1.1 billion tons within a decade from about 779 million tons last year. That indicates demand for iron ore will not appreciably slacken, though the current supply glut may continue tempering prices. China alone consumes roughly two-thirds of the 1.2 billion-ton global seaborne trade of iron ore, with roughly one-fifth coming from Australia's Port Hedland. Rio Tinto is its second largest supplier.

The Quebec North Shore and Labrador Railway. Source: Iron Ore Co. of Canada.

Thus another railway that serves the Labrador Trough (ArcelorMittal operates the Cartier Railway, a second line in addition to IOC's North Shore, that serves the Mont-Wright mine) could still have merit for Rio Tinto because existing capacity isn't sufficient to meet expected demand, albeit from projects that are on hold due to market conditions. Although the benefits would be largely tangential to Rio since they'd serve to merely improve how the region looks for further development, the railway could make IOC that much more attractive to buyers.

Still, even if the government is prepared to study the matter, remember that Canadian National Railway (NYSE:CNI) set aside its own railroad and port facility feasibility study for the Labrador Trough last year because market conditions were so poor. As Cliffs has noted -- and it was partially funding CN's study -- it costs about $90 per ton to produce iron ore at Bloom Lake, and that's barely above the mineral's current cost. The situation has hardly improved over the intervening months, and the estimated $5 billion price tag to build the line remains steep.

If another link to the St. Lawrence Seaway got the green light, the biggest beneficiaries would be the region's junior miners that are waiting patiently to advance their own projects. But Rio Tinto just might find that renewed interest in the Labrador Trough could increase interest in its stake in the Iron Ore Company of Canada as well, and a price more to its liking could once again be in the offering.