Ann: Half Year Accounts , page-25

Falling price puts squeeze on high-end iron ore miners


http://m.theaustralian.com.au/business/opinion/falling-price-puts-squeeze-on-highend-iron-ore-miners/story-e6frg9lo-1226851346146#

THE weakening iron-ore price again shines the spotlight on what sort of a buffer zone our miners are operating on.

While the majors BHP Billiton (BHP) and Rio Tinto (RIO) are clearly profitable, there will be nervous questions about the likes of Atlas Iron (AGO), Mt Gibson Iron (MGX) and BC Iron (BCI) and even Fortescue Mining (FMG) should the ferrous rot set in.

As of midnight, the benchmark sport price for iron ore fines had retreated $US9.50, or 8 per cent, to $US104.70 a tonne.

That takes the one month decline to 13 per cent. In early December the steelmaking ingredient traded at $US140/t.

Subsequent US futures trading points to $US106/t.

According to UBS’s mining gurus, the quoted price can be deceptive because the received price for the individual miners depends on factors such as quality, moisture content and freight costs.
Accounting for these, UBS estimates their cash break-even costs at between $US43/t and $US91/t (based on the landed price).

Seeing you asked, the stock-by-stock numbers are Rio $US43/t, BHP $US45/t, Fortescue $US72/t, Atlas $US82/t, Mt Gibson $US75/t, BC Iron $US70/t, Grange Resources (GRR) $US87/t and Gindalbie Metals (GBG) $US91/t.

On these numbers, things are getting squeezy at the high-cost end. As the biggest pure-play producer, Fortescue is strongly leveraged to further movements one way or the other.

The price weakness follows abysmal trade data from China, showing exports fell 18 per cent in February when the pointy-heads had expected an increase (the timing of the Lunar New Year was a possible cause of the weakness).

Rumours that Chinese bankers have been ordered to stop lending to the steel sector didn’t help

With iron ore more than 20 per cent off its recent highs, Criterion officially declares a bear market.

However in adversity lies an opportunity to pick up miners on the cheap, but of course it all depends on your view of where the price will settle.

Most experts assume a comfortably higher price, $US110/t in the case of UBS.

The price rebounded strongly after the metal tanked to $US88/t in September 2012 and stocks such as Fortescue were, in hindsight, a bargain.

We suspect there’s more pain to come in the interim.

Meanwhile all eyes and ears are on BHP’s and Rio’s respective iron ore chiefs Jimmy Wilson and Andrew Harding, who front a global iron and steel forecast conference in Perth.

Couldn’t be more topical.