article by high grade, page-2

This is an article from High Grade regarding recent iron prices and the demand for iron ore atm. Main thing to note is the $220US per ton.

WITH iron ore prices and demand at record highs and new projects scheduled to start exports in the near future, on paper Western Australia?s fledgling magnetite industry looks set for success. But in a rising price environment uncertainties over taxes and royalties are jeopardising the future of the industry before it has even begun.

Iron ore prices have spent most of this year at all-time highs, with the price for a tonne of magnetite pellets peaking in recent months at $US220, making it one of the higher value iron ore products in the current market.

Two multi-billion dollar magnetite mines, Gindalbie Metals? Karara and CITIC Pacific?s Sino Iron, are due to begin operations in WA in the next year, and Grange Resources? Southdown is due to start by the end of 2012.

And in Queensland, Xstrata has begun exporting magnetite concentrate from its Ernest Henry mine, proving that even among the majors the lower-grade iron product has its backers.

But the hurdles for magnetite, far from falling as the iron ore price rises and massive projects near completion, are mounting.

The release of the Federal Government?s draft Mineral Resource Rent Tax laws, the debate over carbon pricing and the WA government?s stance on royalty rates concern all iron companies in the state, but for the magnetite companies the stakes are extraordinarily high as it is a sector which has yet to produce a single tonne of iron in WA despite already receiving billions of dollars of investment.

According to Megan Anwyl, executive director of the Magnetite Network ? an industry body representing some of the state?s largest magnetite hopefuls including CITIC Pacific?s Sino Iron, Gindalbie Metals and Grange Resources, along with private company Asia Iron and hematite exporter Atlas Iron ? the carbon tax, the MRRT and royalties are the three biggest issues of concern to the industry.

Anwyl said governments, on both a state and federal level, needed to recognise that the industry was still very much a nascent one and further investment decisions needed to be encouraged.

?While a couple of companies have already decided to invest, others are still looking to make investment decisions ? and not just to develop a project in the first place, but to expand projects beyond stage one developments,? she said.

Grange Resources? Russel Clark agreed, and said that there would come a point where companies just could not pay any more and projects would fall over.

?I feel for companies that have a project which is half-built and then all these taxes come in over the top which weren?t part of their investment decision and the taxes come right off their bottom line,? he told HighGrade. ?We?re in a situation where we think we?ve got a healthy project and the decision to proceed will be made early next year ? or not. By then we?ll know what the MRRT and the carbon tax looks like, and we?ll know more about what the iron ore price is doing.?

The good, the bad and the MRRT

On the MRRT, MagNet has been lobbying the government on behalf of its members for an exemption which was not granted under the current draft of the laws because of the hugely capital intensive nature of establishing a magnetite operation.

Clark said while it was disappointing that the government had not exempted magnetite completely, there was at least one positive that had come from the latest MRRT draft.

?We spent a lot of time last year talking to the minister and lobbying pretty hard to get recognition that magnetite is different to hematite. I think that message got through, but ultimately their position was that magnetite should remain part of the MRRT because it is iron ore,? he said.

The taxing point, however, does provide some relief ? it is at the primary crusher, where hematite would be a finished product in most cases. In contrast magnetite still needs a lot of processing to be considered saleable.

?The taxing point is before the concentrator which means we?ve got a pile of rock that isn?t worth a whole lot,? Clark said. ?It doesn?t have a lot of value at that point ? but it is disappointing that we?ll need to maintain a separate set of books to demonstrate we don?t need to pay the tax.?

This adds another layer of administrative complexity that Clark said companies could do without.

And there is a feeling from some in the magnetite industry that the federal government may also be sceptical of magnetite to the extent that magnetite producers would never have to pay the tax as they would be unlikely to make enough ?super profits? to qualify for the tax, and thus see no reason to create exemptions for the mineral.

The companies pumping billions of dollars into their magnetite projects would vehemently disagree with this assessment, although none could deny that when it comes to capital, magnetite is a big ask.

CITIC Pacific?s capital costs, for example, are currently running in the order of $US5 billion after a $US850 million blow-out last year, and the company is yet to export a single tonne of iron ore, although it is due to start production later this year.

Gindalbie Metals, meanwhile, recently flagged capital cost increases of about 30% to $A2.7 billion. A spokesman for the company told HighGrade the company expected to have its revised costing completed shortly but was not anticipating a hike beyond that already flagged. However, analysts at Citi said they expected capital costs to rise by 37% or $A725 million, and Gindalbie would need to find another $A360 million to fund its half of the project.

As for Grange?s Southdown, it has just moved to the bankable feasibility stage, so its final costs are also up in the air. Grange has costed the project at $A2.6 billion but Citi?s analysts have pegged it nearer $A3 billion.

Carbon, royalties and next stage projects

And against this rising price environment the carbon tax is looming ever-closer, with the impact of the tax still unclear despite the recent release of draft guidelines.

As MagNet?s Anwyl explained, the industry also has very little data at this stage to help it assess how much of an impact a carbon tax would have on the bottom lines of magnetite businesses, given that Grange?s Savage River was one of only two operating magnetite mines in Australia.

Nor does the proposed Australian legislation appear to take into account the greater steelmaking cycle.

Magnetite producers will no doubt emit more carbon than their hematite competitors, but they also argue that their products produce less carbon emissions overall because magnetite is a cleaner product when used in steel mills.

Grange?s Clark said it was very disappointing the government had reneged on its promises not to introduce the carbon tax and echoed Anwyl?s point about the relative energy intensity of magnetite from the rock to the steel compared to hematite.

?If this is about a clean planet then magnetite should be the ore of choice and yet it?s potentially going to be penalised that much more here in Australia,? he said. Like Anwyl, he too was hopeful that discussions with the government over the carbon tax could still be fruitful.

The third issue MagNet has been active on is the WA state government?s royalty position. Recently the government lifted the royalties on all hematite products, including fines and lump, to 7.65%, while it also created a new category for magnetite, which will attract a 5% levy. (Previously, magnetite was considered an ?other? mineral). Pellets, meanwhile, will attract a royalty of only 4.5%, but only CITIC Pacific will be producing pelletised magnetite at this stage. MagNet is arguing that this 5% rate, although lower than the rate levied against hematite, is still too high.

?We are in discussions with the state government and we?re seeking a modest concession over a 10-year start-up window, given the capital expenditure of these projects,? Anwyl said.

While projects such as CITIC Pacific?s Sino Iron and Gindalbie?s Karara are close to production, there are the companies such as Fortescue Metals Group and Atlas Iron which are still attempting to attract investors for their magnetite projects, while Grange?s Southdown is yet to receive its final funding go-ahead with the BFS just underway now.

For FMG and Atlas, aside from implications the MRRT and the carbon tax might have for the profitability of their hematite operations, there will also be the question of whether foreign investors will be willing to tackle large-scale magnetite investments in the future. FMG has been quietly working on the feasibility study for its Northstar and Glacier valley magnetite projects with contractor WorleyParsons ahead of the release of maiden resources, expected soon.

The company has flagged it could potentially list its magnetite assets in Hong Kong although the recent failure of Clive Palmer?s ResourceHouse offering may prove to have a chilling effect on large-scale HKSE listings. FMG signed a deal with Baosteel over magnetite in 2007 although the status of that agreement is currently unclear.

Atlas Iron, meanwhile, has been talking up the attractions of its Ridley magnetite project for some time, and most recently the company said in a corporate presentation that interest in the project from international investors was ?high?.

However, a recent note from Citi said that should these less advanced projects be delayed because of the impact of the MRRT and the carbon tax, it would prove a boon for those companies already in production, help keeping prices higher and offset the tax increase. As a result the investment bank said it was bullish on iron ore companies already in or nearing production, including Gindalbie and Grange.

?Combined with rising costs for the marginal producers in China required to keep the market in balance, we stay bullish on the iron ore names despite ... [tax grabs] that appear to be becoming a theme across the sector globally,? Citi said.