no debt and $388 mill in the bank, page-28

The Age - 27th Jun 2011 - BARRY FitzGERALD


ALL THE iron ore in the world is worth nothing unless it can get to market. It is a point Garimpeiro has mentioned previously because the number of Western Australia iron ore hopefuls that have little or no chance of getting into production is downright scary.

Without access to rail and port capacity, their 2.5-billion-year-old iron ore is going to stay exactly where it is  in the ground. Yet they still have fancy market capitalisations.

All that came into sharp focus with last week's bombshell from Sinosteel that it has halted work on its proposed $2 billion Weld Range iron ore project in WA's midwest region. Weld Range was meant to be a 15-million-tonne-a-year foundation customer of the $6 billion Oakajee rail and port development that was set to open up the midwest region as a second iron ore province for WA.

But the Weld Range halt has cast serious doubt on whether Oakajee will now meet expectations for a 2015 start-up, or get up at all. More to the point is that beyond the foundation customers, there is a bunch of other companies that are hoping to piggy-back their projects on the rail and port solution Oakajee would have provided for the midwest.

Good luck to them. But investors looking to capture the rewards of boom-time iron ore prices are best advised to focus on the companies that do have rail (or road) and port infrastructure solutions.

Given Garimpeiro's focus on the junior and mid-tier end of the market where leverage to iron ore's bonanza returns can be the greatest, there is no need to point out that Rio Tinto, BHP Billiton and Fortescue Metals do have the solutions.

Macquarie felt the same last week. In a research note after the Sinosteel bombshell, Macquarie didn't bother stating the obvious about the big three, preferring instead to reiterate its "bullish view on mid-tier producers that have secured infrastructure".

It nominated four stocks in that category and set some aggressive share price targets for them as well.

First up there was Atlas Iron (ASX:AGO), trading at $3.43 a share but with a Macquarie share price target of $5 a share. Second up was Tassie magnetite producer Grange Resources (ASX:GRR), trading at 45.5? and with a target of $1.20 a share if you don't mind. Then came Mount Gibson (MGX:AU) and Norwegian producer Northern Iron (ASX:NFE). Mount Gibson is trading at $1.74 a share and has a Macquarie target of $3. Northern trades at $1.80 and has a target of $2.85.

There are others out there. Not mentioned by Macquarie but one hitched to Fortescue's Pilbara infrastructure is BC Iron (ASX:BCI). It recently revised down some of its near-term production targets from the 50:50 Nullagine joint venture with Fortescue. But it was nothing serious.

Analysts at Argonaut Securities, which has done corporate advisory work for BC Iron, said in a recent note that while the revisions were not overly material from a valuation perspective, the "significant" revision to 2011 financial year production guidance was disappointing. But it nevertheless reckons that as Nullagine hits its straps and demonstrates its ability to meet production targets, the stock will trade closer to its valuation of $3.60 a share. BC iron last traded at $2.88 a share.