Co-processing of heavy oil and a low-grade iron ore which contains a large amount of FeO(OH) is proposed to produce both light oil and a raw material for iron making called iron ore/carbon composite (IOC). When the mixture of the heavy oil, an oil sand bitumen's vacuum tower bottom (VR) in this work, and the low-grade iron ore was heated up to 300 degrees C, the VR filled up the layered 0.8 nm-wide pore space which was formed by the dehydration of FeO(OH). When the mixture was further heated over 400 degrees C, the VR in the pore space was catalytically cracked to produce light oil in high yield. The resulting low-grade iron ore consisting of Fe2O3 and containing high-molecular-weight compounds, coke, in the pore space is expected to be utilized as a high quality IOC, as reported in our previous paper.