china's ore lust is long term not near term, page-8

Taken from the AGO forum.. might be of interest


Iron ore’s heartening signs
By Tim Treadgold
February 9, 2009


PORTFOLIO POINT: A handful of Australian iron ore miners could benefit from the return to optimism in the iron ore trade.
The price of iron ore, as sold in the sometimes erratic “spot” market, is rising, not falling, an event some early bird speculators have taken as a sign that the worst of the global commodity price squeeze is over.

“Perhaps” is the only correct response to their view, although it is interesting to note that most small iron ore stocks have risen strongly in recent weeks.

Adding to the belief that the storm is passing are first-hand accounts of shrinking stockpiles brought back from China by some of the world’s top mining executives, and the spot-market iron ore price graph compiled by the Platts wire service (see below).


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Platts, a member of the big McGraw Hill publishing group and best known for its energy-information services, says the spot price for 62% iron has risen from about $US55 a tonne last November to about $US75.

It could be slightly better than that. Mark Hancock, chief financial officer at Atlas Iron, which has just started shipping ore to Asia, says he has heard of spot sales as high as $US80 a tonne “as demand continues to grow”.

Atlas is one of the small stocks likely to benefit most from an improvement in the iron ore market. It started shipping small volumes of ore last year.

Other potential beneficiaries from a return to optimism in the iron ore trade include Fortescue, Gindalbie, Ausquest and Golden West.

Fortescue Metals Group has risen sharply over the past few weeks (including a gain of 31% last week) as it shakes off the effects of the iron ore glut and botched shipping contracts. Gindalbie Metals last week won shareholder approval for its plan to move much closer to the Chinese steel maker, Ansteel, and has risen by 57% since mid-December.

Ausquest and Golden West are two exploration plays that have been hand-picked by one of America’s biggest miners, Cleveland Cliffs, as being the juniors most likely to succeed. Ausquest has not yet reacted, and at 10.5¢ is trading at about a quarter of the 40¢ price paid late last year by Cleveland Cliffs for a big share placement. Golden West is also stagnating at around 30¢, but is close to breaking free of a messy Opes Prime margin lending deal that hobbled its one-time biggest shareholder, Fairstar Resources.

Before looking too closely at stocks that might benefit from a change in market conditions, it is worth examining the evidence and, more particularly, the calibre of the people delivering the message.

Last week, as Hancock was discussing with us what his company was seeing in the spot market, the world’s top mining executive, BHP Billiton chief executive Marius Kloppers, was telling much the same story.

The day before Kloppers spoke optimistically about the supply-and-demand situation for iron ore, Fortescue chief executive Andrew Forrest said the same thing, and late last year, the head of Rio Tinto’s iron ore division, Sam Walsh, won the award for being first to spot the change.

In hindsight, few investors would have noticed Walsh’s comments, which did not travel much further than a trade magazine.

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However, it is worth going back to December 19, when Walsh was interviewed about China’s demand for iron ore. He told Mining Monthly magazine that: “Port stockpiles are getting down to about 60 million tonnes.”

The significance of that number, Walsh explained, is that “it’s below 30-day requirements (for steel mills). That’s starting to get into the range of getting tight.

“There are signs that things are starting to head in the right direction. We’re seeing some recovery in the long-product producers, particularly in the north of China. We’ve seen spot prices bounce from $US60 a tonne to $US70 a tonne. It does mean there are some encouraging early signs.”

Then on February 4, Andrew Forrest told a Melbourne Mining Club lunch that the “fundamental drivers” of the resources boom were still in place. He said iron ore prices had to fall 40–45% just to get back to last year’s price levels, “and I don’t recall anyone whingeing about last year’s iron ore prices”.

Then came Kloppers. After releasing BHP Billiton’s half-year profit result and delivering a surprisingly upbeat assessment of future demand (hence the higher dividend), Kloppers said the stockpiles of iron ore that have clogged Chinese ports since the middle of last year were shrinking.

“The destocking is essentially complete,” Kloppers said. If there isn’t a sudden collapse in demand, BHP Billiton was confident of maintaining its current rate of production into the second half, he said.

One result of the rosier outlook, according to Kloppers, is that the spot market price for iron ore is back to within “10–15%” of last year’s record-high long-term contract prices.

It is not wise to directly transfer evidence from the iron ore spot market to the long-term contract market, which is currently at the starting point of an annual price fixing regime known as “the mating season” – when iron ore miners meet Asian steel mills (generally at posh golf clubs).

However, the spot market price is one of the factors considered by both sides. Last year, as the spot price soared to about $US175 a tonne, the long-term price was fixed at about $US92 – although pinning down a common price for iron ore is impossible because of its different qualities and because of discounts applied if impurities such as phosphorous or alumina are in the ore.

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For investors the key message is to note the observations of well-informed industry leaders such as Kloppers and Walsh, and the rising level of optimism expressed by high-risk newcomers, such as Forrest.

Despite their radically different approaches to business, all three are seeing the same optimistic signs of shrinking stockpiles, perhaps encouraged by Chinese government taxes on material left in a port.

There is also a secondary factor at work, which Robert Gottliebsen highlighted last Friday – the currency effect. As an example, last year’s $US92 a tonne price was fixed when the exchange rate was about US90¢, producing an Australian-dollar iron ore price of $A102 a tonne.

Today, with the exchange rate much lower, even a long-term contract price cut of 30% still leaves the Australian-dollar iron ore price at $A99 a tonne, while a price cut of 25% actually produces an Australian dollar price rise to about $A106 a tonne, such is the effect of the fall in the exchange rate from US90¢ to US65¢.

Speculators have seized on the early evidence, reloading their trading accounts with potential players in the iron ore game.

Last week, for example, Brockman Iron rose an eye-catching 13.5¢ (15%) to $1.02. Northern Iron, which is re-developing a project in Norway added 11¢ (10.2%) to $1.18, and Jupiter Mines, which has been singled out by one-time BHP Billiton boss Brian Gilbertson as an investment target for his Pallinghurst group, rose 1.8¢ (25.7%) to 8¢.

There is a trend evident, but it is a speculative trend. The real test comes when the annual mating season culminates with an announcement on long-term iron ore prices for next financial year.

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Tips for the long-term price fix range from a fall as low as 20% to a fall as high as 40%. If the 20% is achieved it would be the same as a big win for Australian miners. That’s why Atlas iron, which is on target to expand from a few shipments to 12 million tonnes a year by 2012, is worth re-visiting, as are:


Fortescue, because it continues to deliver on (most of) its promises and appears to have settled a potentially damaging shipping dispute. If Forrest could promise less and deliver more the stock could accelerate rapidly.

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Gindalbie, because it is blazing a new trail in the Australian resources sector, which features a much closer association with a Chinese steel mill and the most powerful bank in China, the government-controlled China Development Bank.
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Ausquest, because Cleveland Cliffs has put its money where its expertise lies. The American major has a 30% stake in Ausquest (acquired at 40¢ a share) and is obviously keen on the small Australian companies Rocklea and Nameless projects.
Golden West, because it is emerging as a corporate play thanks to what looks to be the final unwinding of an investment caught in the Opes Prime mess. Fairstar Resources, which once owned 33% of Golden West, told the ASX last week that it was thinking of selling its final 18.3% in Golden West because it was running out of money. Cleveland Cliffs snapped up an 18.4% stake in Golden West last year, mainly in an Opes Prime sell-off, and is poised to go on buying.