Hopefuls need access ore risk losing out Barry FitzGerald February 16, 2011 - 8:13AM
The more chatter there is about the inevitable fall in iron ore prices, the higher the price seems to go.
Rio Tinto boss Tom Albanese was the latest to join the chatter. ?I think anyone that invests on the basis of today's prices is likely to be disappointed down the road," Albanese said last week.
But while his comment was spinning around the world, the spot price in China moved higher still to more than $US190 a tonne. At that sort of price, Garimpeiro and his mate with a ute could make a fortune in the iron ore business. Advertisement: Story continues below
Still, Albanese's comments are worth bearing in mind when investors look over the dozens of fancy priced iron ore hopefuls out there.
If the hopefuls don't overcome their rail and port access issues in a hurry, they could well miss the boat.
It could be one of the big trends in this market in 2011 ? a shift away from those iron ore juniors without an infrastructure solution to a focus on those with real near-term production potential. It promises to be a share price-painful experience for those without a solution, rewarding for those that do.
South Australian iron ore developer, WPG Resources (ASX:WPG), falls in to the latter category. It closed yesterday at 85 cents, having started the year at around 70 cents a share.
Its start-up project, the $168 million Peculiar Knob project, is now fully funded and should get in to production late this year, subject to some government approvals being ticked off by the end of March.
It benefits where others don't from having access to some 600 kilometres of existing rail line and an export point at Port Pirie, where all it has to do is build a stock shed and a loader.
At the current bonanza iron ore price, Peculiar Knob's annual mine operating surplus from a planned 3.3 million tonnes of production would be something more than $330 million.
If only that were the case for the $230 million company. Using more realistic iron ore price assumptions, Veritas Securities ? it helped WPG with its equity raising for the project ? reckons Peculiar Knob's earnings capability is pretty impressive anyway.
In a recent note it forecast that WPG could earn $42 million in the 2012 June financial year and $116.5 million in 2013. While that potential is a big factor in the Veritas' $1.87 a share valuation of the stock , it's not the end of the WPG story.
Come June, it is hoped that the Federal government will adopt a recommendation for the Woomera rocket range to be home to both weapons testing and mining.
That would bring WPG's Hawks Nest project in to the frame, both as an additional supply of direct shipping iron ore (DSO) and in the longer term, magnetite. Combine Peculiar Knob with Hawks Nest, some 55 kilometres to the south-west, and WPG's mine life gets pushed out to something more than the all-important 10 years that the market likes.
Not content with that, WPG has also sweetened its appeal by adding a coal leg to its story. It is the Penrhyn sub-bituminous coal project, in South Australia's Arckaringa Basin.
WPG has matched it up to a US company with "clean coal" technology which upgrades low value sub-bituminous coals and lignite to higher rank thermal coal quality.
The Arckaringa is not short of coal resources. But it is short of quality coal. With the current coal craziness lifting the asking price for undeveloped thermal coal resources in Queensland to $2 a tonne, the Arckaringa technology play ? at an all up cost of no more than $2 million to WPG - has got to be worth a shot.
