analyst comments, page-39

Analysis in the Australian today...

"UBS today pointed out that the price actually received by local producers is much less again, due to freight costs, adjustments for iron content, royalty charges and other adjustments. So much so that a number of producers would now be generating negative margins at the level of earnings before interest and tax.

The analysis (based on $US93 a tonne spot price of earlier in the week) shows that the big two of the Pilbara, Rio Tinto and BHP Billiton, actually receive about $US77 a tonne for their iron ore. That's enough for their low-cost operations to generate an ebit margin of $US40 a tonne for Rio and $US34 a tonne for BHP.

It gets ugly after that. UBS estimates the ebit margin for Fortescue has been crunched to a thin $US9 a tonne, or less, if you account for continued price weakness.

It is against that background that debt ratings agency Moody's today placed Fortescue debt on review for possible downgrade, from the current sub-investment grade of Ba3.

Moody's said: "The rating action reflects the considerable constraints on Fortescue's liquidity profile due to the rapid and continuing decline in the iron ore price to levels that are below our base case expectation."

Fortescue is not alone in feeling the price pain. UBS estimated that Atlas is now generating a negative $US18 a tonne margin at the ebit level, Mount Gibson a negative $US2 a tonne and Grange a negative $US26 a tonne. BC Iron, which has a joint venture with Fortescue, remains ahead with a $US10 a tonne margin at the ebit level.

The margin squeeze - or the complete absence of a positive margin at current prices - has seen the share prices of iron ore producers trashed in recent weeks. UBS echoes others by suggesting that, while there might be further short-term downside risk to the iron ore price, a "typical seasonal lift in ore prices in the fourth quarter" is expected.

UBS forecast a return to prices of more than $US125 a tonne and noted that in October 2009, a sharp correction in prices was followed by a sharp rally. That was due mainly to much of the Chinese iron ore industry being unprofitable at prices below $US120 a tonne.


http://www.theaustralian.com.au/business/markets/iron-ore-price-squeeze-more-dire-for-miners-than-thought/story-e6frg91x-1226462535319