Part of the report below
Puting it all in Perspective
Iron ore prices are booming but as we know, it is a cyclical market. We are near the top of the cycle now so anyone producing iron ore should be making good profits, whether they are operating at 1 Mtpa or 100 Mtpa, the level at which economies of scale enable super profits. It is okay to be a swing producer at the top of the market, but these companies will struggle to stay afloat at the bottom.
Genmin is a potential future producer that will neither benefit from record high prices we have been seeing, nor will it suffer from a downturn in prices in the foreseeable future ... because it won’t be developing its mines in this cycle. Nevertheless, like every company in the iron ore sector, its share price movements will be influenced by the outlook for iron ore prices.
While not planning to be a “super producer”, with the BHP, FMG and RIO volumes, it nonetheless will have reasonable economies of scale and a long life. Its high grades of 60-64% and low impurities will give it some niche advantages.
Perhaps its biggest advantage will come from its African location and the desire for China to invest in projects beyond the oligopoly of the Pilbara producers. We saw how this policy helped FMG to get up and running. China will continue to promote competition amongst iron ore producers around the globe, providing infrastructure development support and purchase orders for iron ore product.
The weakness in the share price following the IPO could be a perfect time to take a position, especially if you are a longer term investor; though there will be plenty of volatility in the share price and trading opportunities before the first shovel bites into the ground. It would be akin to buying FMG in the early days, at 50¢ a share.
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