Iron ore price, page-22100

Fortescue to win from Simandou, argues UBS

Robert Guy

Fortescue Metals Group could be a winner from the development of the Simandou iron ore project in Guinea, argues UBS.

The development of the $US14 billion project looms as a prospective competitor to Australia's big iron ore miners as it will offer China an alternative source of high grade ore.

The consortium aims to produce between 60 million tonnes and 80 million tonnes a year, which would equate to a capital intensity of around $US175 a tonne.

This compares to replacement spending in the Pilbara of between $US40 a tonne and $US60 a tonne.

Fortescue CEO Elizabeth Gaines. Supplied

UBS estimates the iron ore market is around 1.5 billion tonnes a year, with 150 million tonne of that considered high cost with a break-even cost above $US70 a tonne.

There is also around 200 million tonnes of "contestable" high cost Chinese ore.

The broker reckons the entry of Simandou's 60 million tonnes to 80 million tonnes won't materially impact its long term iron ore forecast of $US55 a tonne.

But UBS said it provides China with an alternative source of ore at a time of elevated trade tensions with Australia.

It says that China blends high grade ore to ensure the right feed into its steel making blast furnaces.

The broker argues that additional high grade ore from Simandou could see increased demand for low grade ore, which may benefit Fortescue at the expense of BHP and Rio Tinto.