high risk rating

Hi.

I said in a prior post that I was going to try and get some sort of understanding why Austock rated BC Iron as high risk. I contacted someone in the business a while ago,(not at Austock) and he said to me that some consider BCI at FMG's mercy because of BCI's dependence on FMG infrastructure. However that isn't the reason why BCI was given a high risk rating by Austock. The real reason that I can ascertain, is that BCI is a pure iron ore play and as such is seen as high risk since BCI depends on the Chinese economy remaining buoyant with the demand of IO continuing into the future.

I have a seperate opinion to the Austock analyst regarding BC Iron as high risk.

Firstly I'd say the analyst is using blanket coverage with BCI. What I mean is those who have to evaluate potentially a hundred stocks won't know the in's and out's of every single stock intimately, that would be impossible. So therefore it's easier to feed figures into a computer to create a speadsheet. The high risk comes with the IO territory. So I'd imagine the same analyst would be placing a high risk rating on Atlas Iron as well because it's also a pure iron ore play.

However I believe I know just as much if not more about BC Iron than the Austock analyst and this is my opinion.

If GFC2 comes along, what will be the key for survival if you were a pure iron ore play? Well probably most importantly, to be a Hematite producer. Magnetite producers have a much higher cash cost per tonne than Hematite producers. Most Magnetite producers have cash costs of $85+ a tonne. If the price of IO did drop in GFC2, the floor will always be when Magnetite producers are no longer viable. Considering that some Hematite producers will have cash costs of $40 a tonne lower. That has given Hematite producers a margin in GFC2. Since BCI has cash costs of $40 to $45 a tonne, BCI will continue to have a margin to sell ore, whilst Magnetite producers are moth balled.

The other thing to consider is that the spot price can continue to fall to silly levels. If my memory serves me right. During GFC1, the benchmark (when there was still a benchmark) was set by Nippon Steel Japan at USD$60t. But the spot price fell to a low of USD$35t. Those who didn't have an off-take agreement with an Asian mill were vulnerable.

There's also the quality of the product. The benchmark for fine ore in Australia is Yandicoogina fine ore with a Value In Use of 100. Most fine ore producers in Australia will be given a penalty to Yandicoogina's VIU100. The discount will not only depend on the CaFe grade but also the DEs in the ore. Alumina and Silica are pains in the backside for Asian mills since they need to work the funaces harder to remove these impurities. But Asian mills will never be able to remove the most lethal DE, that being Phosphorus. It's imperative that any iron ore miner has a P reading below 0.07%, otherwise you will be discounted to the benchmark which inturn will lower your margin in an already tight market. It could also make your product unsellable since importers could pick and choose their product during any recession.

So using a checklist, how does BC Iron look?

- BCI is a Hematite producer.

- BCI has low cash costs. $40 to $45 lower than Magnetite producers.

- BCI has a off-take agreement which means BCI won't be relying on the spot price during GFC2. Infact BCI's off-take partner HengHou Industries, was/is also the capex provider for BCI's Nullagine mine.

- BCI has arguably the lowest Phosphorus mine in the world. There are lower Phosphorus mines in the world such as WPG's Peculiar Knob. But these are Magnetite mines and potentially have low LOI figures which gives virtually no Fe upgrade post sintering. Infact, if the material isn't porous - in the case of low LOI materials, the material more resembles Granite. The material needs to be 'pelletized' and cannot be sintered the conventional way. MGX's Koolan Island may have a P reading lower than BCI, (Koolan Island P 0.01% ; BCI P 0.014%). But Koolan Island has a LOI of 0.41%, compared to BCI's 12.3% LOI.

- BCI has a VIU of 106. The product is being paid a premium to the benchmark and doesn't incur any discount.

I personally consider BCI's Bonnie fines as recession proof, and as such makes me take the high risk rating with a grain of salt. BCI will always have a market for their product. Who of sound mind would think that during GFC2, the lowest Phosphorus Hematite mine in the world would be moth balled? Valin Hunan may have something to say about BCI being moth balled, even if HengHou didn't mind the idea. But it's silly of me to even say that because it just won't happen.