Small and mid-cap Australian miners will struggle to escape the fate of Atlas Iron as the iron ore price staggers far below their costs of production, fund managers warn, with Gindalbie Metals potentially the next domino to fall.
Trade in Atlas stock was voluntarily suspended on Tuesday, as the company announced a big review that may include the mothballing of its operations.
The price of iron ore for immediate delivery at the port of Qingdao in China was $US48.06 a tonne on Wednesday evening, a long way below Atlas' $US63 break-even price, on UBS estimates and those of other junior miners.
Atlas is losing about $40 million a quarter with the iron ore price near present levels, Macquarie analysts estimate.
"It's not pretty," Platypus Asset Management senior analyst, Anna Kassianos said. "Most iron ore miners excluding the majors have backed themselves to the wall and are in desperation mode."
Ms Kassianos said Gindalbie was "in a similar boat to Atlas", given its debt load and cost of production, while BC Iron was also looking shaky after the recent termination and replacement of mining contractor Watpac.
A spokeswoman for Gindalbie said no one from the company was available to comment.
"Mount Gibson is probably the strongest of the small-cap miners", she said, referring to its strong cash position and low debt.
"But at the same time it doesn't have any growth and its remaining mines have a very high production cost."
Ms Kassianos expected the collapse of small local miners would have no significant impact on global iron ore supply, but the closure of even one Fortescue Metals Group mine such as Cloudbreak could take the price upward.
Cost advantage exploited
The price of the bulk commodity has declined almost 25 per cent since Atlas announced its half-year profits in late February, as large miners continue to exploit their cost advantage by ramping up supply in the face of lacklustre Chinese demand.
The junior miners receive an even lower price than the benchmark – as much as 16 per cent – because they sell a lower-grade ore than big players such as BHP Billiton and Rio Tinto.
Katana Asset Management portfolio manager, Romano Sala Tenna said he holds "a handful of shares in BC Iron" but otherwise had almost no exposure to iron ore miners in his fund.
"Atlas was always going to be the one that was first to encounter problems," he said. "Everyone is losing money to varying degrees so we have categorised them as those under duress but with a strong balance sheet, such as BC Iron, Grange and Mount Gibson. Then there are those under duress without a strong balance sheet and they are Arrium, Atlas and Fortescue."
Allan Gray portfolio manager Simon Mawhiney said his fund's investment in two small miners, Arrium and Mineral Resources, had nothing to do with their mines.
"We think the iron ore operations are close to worthless," he said.
Rather, he saw value in Mineral Resources' iron ore crusher, used by BHP and Rio, and Arrium's steel production business. He said strengthening local demand for steel and a customs crackdown on illegal dumping would improve Arrium's fortunes.
Investing in small, undiversified iron ore miners, on the other hand, could lead to "extreme profits or extreme losses".
"People tend to underestimate the length and depth of the cycle," he said. "It would be quite easy to lose all your money if [the] current spot price prevailed for the next couple of years."
Pengana Capital Management portfolio manager, Tim Schroeders said he saw significant differences between Atlas and other small and mid-cap players.
Atlas was focused solely on iron ore, had large debts and little ability to reduce supply. Other junior miners had more room to move. BC Iron could "go slow" on developing sites such as Iron Valley in the Pilbara and Arrium could focus more on its steel production business.
Mr Schroeders said Fortescue, the country's third-largest listed producer, had "a fair degree of optionality to survive a protracted downturn in iron ore prices".
The company could cut production, take on new equity partners or sell assets such as mines or freight infrastructure. He expected the miner's size would also count in its favour because iron ore buyers did not want Rio Tinto and BHP to control more of the market.
Mr Schroeders said the company was already receiving some forward payments and others could adopt more-creative pricing deals.
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