eureka report recommends a sell for gbg, page-7

the article in full:


Rio could trample iron minors
By Tim Treadgold


PORTFOLIO POINT: It’s plan to treble output of haematite, the higher-quality iron ore, would wreck the prospects of small magnetite producers.


When elephants fight smaller animals run for cover. It’s the same in the corporate world, which an entire sub-sector of the iron ore business is about to discover as it becomes potential “collateral damage” in the battle between Rio Tinto and BHP Billiton.

Yes, the BHP move on Rio is good for iron ore stocks but only haematite iron stocks. For magnetite iron stocks, it's very bad news. And the magnetite iron sector houses some of the best known punters’ favourites in the mining industry. There's Gindalbie Metals and takeover target Midwest Corporation, along with Atlas Iron, Cape Lambert Iron, Grange Resources, Australian Resources and Goldstream Mining. If you have bought – or are about to buy into – any of these stocks think, again. Here's why:

Magnetite miners were already in trouble but this week's Rio Tinto defence has loaded the odds against them. Rio has revealed plans for a spectacular increase in the production of haematite, possibly trebling output from about 200 million tonnes a year to more than 600 million tonnes, with 420 million tonnes coming from the Pilbara region of WA.

That expansion, which represents a dramatic acceleration of mine development plans, is designed to give Rio Tinto a bigger slice of the world iron ore market than it already has. However, it also means much less room for new, high-cost, miners – and the newest and highest cost are the magnetite hopefuls.

Put simply, magnetite is an inferior ore to haematite – and it's haematite that's preferred by the world’s major iron ore exporters, including BHP Billiton, Rio Tinto and the big Brazilian, Companhia do Vale Rio Doce (CVRD) – and, from next year, Fortescue Minerals. It's also the iron ore preferred by all the miners in my October feature Iron ore’s hotter prospects.

Why are the magnetite miners heading downhill?
The ore itself contains much less iron. Typically, haematite grades 55–60% iron, while magnetite is 30–35%.
Processing magnetite involves physical separation of the iron and the waste rock, and then intense heating, before conversion to a semi-finished product such as high-value pellets.
While the physical separation process is easy (as the name implies magnetite is strongly magnetic), the heating requires very large amounts of energy – a luxury at a time when the oil price is approaching $US100 a barrel, and coal prices are rising in sympathy.
The capital cost of magnetite processing is also high. None of the planned projects in Australia come in at less than $1 billion, and raising the debt component for all resource projects has become a lot harder as banks retreat under the sub-prime credit onslaught.

In a resources boom, when supplies are tight and prices high, mining and processing magnetite might make sense although very little of the material is transported over long distances without expensive upgrading.

Of course, those mining magnetite iron won't agree. True believers in magnetite argue that it is the iron ore of the future, that Chinese customers are comfortable working with it, and that Australia is endowed with vast deposits of the material.

They’re right on all three claims. The Chinese do want it, the outback of WA is littered with trillions of tonnes of the stuff, and it is an ore of the future.

But, those same Chinese steel mills that say they will buy magnetite, and are willing to invest in Australian projects, will soon be offered increased supplies of haematite thanks to existing expansion planned by CVRD and BHP Billiton, and even more now that Rio Tinto is running scared from BHP Billiton’s marriage overtures and seeks to impress its shareholders by expanding faster than anyone else.



The deciding factor for customers will be price and reliability of supply. On both of those measures haematite, whether from a mega-miner or one of the smaller producers, will be the winner.

What this means for stockmarket values is:
Companies offering a pure magnetite investment proposition, such as Grange, Cape Lambert, and Australasian will struggle. They might prosper in the future but it could be a very, very, long wait for a dividend cheque. Best advice: sell.
Companies that offer a mixed haematite/magnetite investment proposition, such as Gindalbie, Midwest, and Atlas, are almost certainly over-priced. They will make money from selling haematite, but they will struggle to raise the capital or secure energy at a reasonable price to make the jump to magnetite production. Best advice: sell.
Companies that are pure haematite propositions, even if small, have the appeal of production simplicity, and customer preference in their favour. Stocks such as BC Iron, Yilgarn Mining, and FerrAus are following the KISS principle of “keep it simple, stupid”. Best advice on KISS stocks: buy.
The debate over magnetite and haematite is broadly similar to the historic debate of replacing high-grade “sulphide” nickel ore with low-grade “laterite” ore, the key being that there is much more laterite ore in the world than scarce deposits of sulphide material.

But, that comparison fails two tests.
There is no shortage, yet, of haematite as Rio Tinto is demonstrating by casually rolling out a plan to triple output.
Processing laterite ore has been a disaster for everyone who has tried it. Anaconda Nickel (now Minara Resources) was almost destroyed by design failures. BHP Billiton has been hit by a doubling in cost and time at its Ravensthorpe laterite nickel mine in WA.

Sad as it might be, the simple truth about mineral processing is that Australia is not very good at it. High internal costs, such as long transport distances, expensive labor (and potentially getting more expensive), and high energy costs mean that more processing plans fail than succeed.

In WA, an epicentre of the current global commodity boom, and a centre of past booms, there is an appalling record of processing failure with the common thread being high energy costs and distance from markets.



Today’s “magnetite promotion boom” has the hallmarks of booms (and busts) past.

Readers with long memories will recall the time when WA was going to be home to a number of steel mills. In fact, the requirement to build a steel mill is contained in the original iron ore access agreements signed with the WA Government in the 1960s by the corporate ancestors to the modern BHP Billiton and Rio Tinto.

There are no steel mills in WA. But there are: a failed blast furnace at Kwinana; two failed iron pellet-making plants; and a failed hot-briquetted iron plant (that almost crippled the John Prescott-era BHP). There might be a successful HIsmelt plant.

It’s the same with plans for petrochemical plants along the west coast (Alan Bond and the late Laurie Connell promised one of those); numerous chlor-alkali plants converting salt and natural gas into caustic soda and plastics feedstock (none yet); paper pulp plants; and aluminium smelters – to name the best, and least successful.

Magnetite, despite its undoubted potential, is just the latest boom-time commodity, and it faces the same hurdles as all previous west coast boom-time commodities:
Isolation and long transport distances.
High energy costs.
Poor, or non-existent, infrastructure.
Dithering government.

Chinese demand for iron ore lies behind the rush to develop magnetite processing plants, and while one or two might be built they will be the high-cost source of iron and will deliver investment returns (if any) far below the simpler haematite mines of BHP Billiton, Rio Tinto and some of the smaller miners.

For the final test of this investment comparison between magnetite and haematite consider the level of involvement by BHP Billiton, Rio Tinto and CVRD in magnetite – zero. What else do you need to know?