australian article on io juniors

Divide or conquer: $1bn pile paves way for bargain plays

by: Paul Garvey
From: The Australian
July 23, 2013 12:00AM

AUSTRALIA'S band of small iron ore miners has quietly amassed cash holdings of well over $1 billion, leaving them well placed to snap up cut-price acquisitions or ratchet up their returns to shareholders.

BC Iron yesterday became the latest junior iron ore producer to report a big uplift in cash holdings on the back of the June quarter, delivering a company record quarterly cashflow of $85 million.

In addition to paying down $48m of debt, BC Iron lifted its cash position over the three months from $99.8m to $138.5m.

The boost in BC Iron's cash position came just days after fellow miner Mount Gibson Iron declared it had boosted its cash holdings by $34m to $376m, with the company debt-free.

Other smaller iron ore miners such as Atlas Iron ($404m in cash and $263m in debt at the end of March) and Grange Resources ($164.3m in cash at the end of March) are yet to update the market with their latest quarterly results, but are likely to have further strengthened their balance sheets during the period.

The balance sheet boosts being reported show the ongoing cash-generating ability among the smaller iron ore miners despite investor gloom around the outlook for resources and economic conditions in China, which has seen the share prices of many in the sector plunge from year highs.

Iron ore prices have held up in recent months, currently sitting near $US130 a tonne, while the recent weakness in the dollar has helped further insulate the earnings of the Australian-based miners.

The junior iron ore miners, which generally have higher operating costs than established major iron ore miners such as Rio Tinto and BHP Billiton, have all been sold off in recent months amid projections of a fall in the iron ore price.

Shares in Atlas Iron have more than halved since February, while Grange and Mount Gibson have both fallen by more than 35 per cent in the same timeframe.

Analysts said the growing bank balances within the junior iron ore miners suggested an increased capability to pursue mergers and acquisitions, lift dividends or open up share buy-backs.

But the pessimistic outlook for iron ore prices may also compel the cashed-up miners to preserve their positions in order to better ride out any volatility.

The September quarter has historically been a more volatile period in the iron ore market, with last year's precipitous fall in the price to less than $US90 a tonne during August and September wiping out profitability across the sector.

RBS Morgans analyst James Wilson told The Australian that the growing cash piles held by the miners were likely to be secondary in the eyes of investors to the deep cost-cutting initiatives taking place across the sector.

"People want to see those cost-cutting measures, whether you're making money hand over fist or not. They want to see everyone pulling their head in," Mr Wilson said. "The reason the iron ore equities are being priced as they are is because people don't believe the longevity of the iron ore price high. The cash conservation and being smart with their dollars is more important."

Mr Wilson said he expected the iron ore miners to sit on their cash in the near term, both for added protection in the event iron ore prices slide again and to pursue acquisition opportunities if confidence in the market lifted.

"If I was a company with money in the bank, I'd certainly be conserving it in case things got worse," he said. "But if things get better, (companies could use that cash) to look at projects and make that bold move to acquire projects that could be quite cheap."

One fund manager, who spoke anonymously, said the balance sheet strength was overshadowed by ongoing concerns about the long-term iron ore supply and demand dynamics.

"Iron ore prices are still at a good level -- they're at a really good level in Aussie dollar terms -- but everyone is worried about where they'll be in six months' time," the fund manager said.

"Everyone in China thinks they're over-producing steel and they've got to cut back on production. Steel growth is going to slow, and that is going to be a headwind.

"At the same time you've got some big iron ore expansions coming through in the next 12 months as well, and production is going up. So you're potentially facing a bit of a pincer movement."

The fund manager flagged that acquisitions by the iron ore miners were less likely, due not only to the outlook but also the lack of quality assets available and the ongoing comparatively high cost base in Australia.

He said the cashed-up miners could be better off following the lead of Terry Burgess, head of copper-gold miner OZ Minerals, who gave back a portion of the miner's large cash position to shareholders in a special distribution while also retaining enough money to pursue possible opportunities.

Despite years of hunting for assets, Mr Burgess is yet to produce the big acquisition that the market has been waiting for.

"What Terry Burgess did at OZ Minerals was the right strategy," the fund manager said.

"He's dodged a lot of bullets just by not buying anything in the last few years. In hindsight, the best strategy for mining companies with cash has just been not to buy anything."

Mount Gibson has previously indicated it is looking at potential acquisitions of iron ore or coal assets in Australia, while BC Iron chief Morgan Ball has said he is happy to simply return cash to shareholders -- unless a highly value accretive acquisition opportunity emerges.