The announcement of the Shanghai stock exchange yesterday got me thinking.
Hebei Steel (2nd largest by output in China, 4th largest in the world by output) puts in place long term contracts with AXO to buy 50% of AXO output (3 million tonnes out of projected 6 million tonnes).
Doesn't take any stake in AXO, but AXO will be supplying roughly 8% of their total iron purchase (3 million tonnes out of a total of 36 million).
Which makes me wonder the following:
1. Is AXO holding more good news from the market while Hebei takes a strategic stake in the company? If I was Hebei and I knew that AXO would make a packet out of this deal, I would expect this as a matter of courtesy.
2. We all know that long-term contracts can be broken at a price. Why would the 2nd largest steel producer in China continue to support a minnow like AXO when less risky players (RIO etc) have iron ore to give away? The fact that they have not taken a strategic stake in AXO is even more intriguing. Unsual confidence from Hebei. Let's not forget that iron ore (with a dusting of vanadium of course)is strategically important to China's bid for world no.1 power..we are not talking poly alloys here.
3.Surely AXO and Hebei have discussed the risks associated with the project not going ahead (i.e. credit risk, delays)......they must have addressed this issue. Contingency plans, source of credit if traditional avenues fail etc.
Friends, I won't pretend this isn't a risky stock....it most certainly is. However I feel the credit risk has been over played as part of the GFC. Good companies can still raise dough...good projects can get off the ground. This is not a ramping, it is merely fact.
Your thoughts?
Disclaimer: Holder and long-term supporter of AXO.
AXO Price at posting:
25.0¢ Sentiment: LT Buy Disclosure: Held
