Mini-miners In Australia Ride High In The Iron Ore Game
By Our Man In Oz
Conventional wisdom says that iron ore is such a low-value commodity that the only way to make money from it is to sell it in bulk. And by bulk, that means heavy-duty railways delivering tens of millions of tonnes to ships that carry half-a-million tonnes at a time. Think again. Iron ore today, with its price high and rising, can be better than a goldmine. Rather than go to the expense of building a railway, why not just whack a load on the back of a truck, drive it to port and send it to China on any old tramp steamer that cruises by. This is the new world of the iron ore (mini division), a hugely profitable business – so long as China booms.
In Australia, where iron ore litters the outback like confetti at an Italian wedding, mini-miners have emerged as a new class of stock, and one being played gleefully by the locals. Mt Gibson Iron, Midwest Corporation, Murchison Metals, and Iron Ore Holdings are among the leaders. A cast of hopefuls is following, including AusQuest, Echelon, Niquest, International Goldfields and Atlas Gold. There’s a clue hidden in the names of the last three, each was once interested in something else. Niquest was a nickel hopeful, and International and Atlas once had gold as their primary interest.
One simple factor changed the game. The 71.5 per cent price increase won by Rio Tinto and the other big boys of iron ore from Asian steel mills earlier this year. Coming on top of modest price rises over the past two years the monster price hike did two things; deeply annoyed the Chinese Government and meant that iron ore had doubled in price in just three years. The fact that it looks like rising again early next years means that the iron ore game has changed dramatically.
Best example of the change is Mt Gibson, a mini-miner with a fat bank account. In the financial year to June 30, Mt Gibson sold just 1.84 million tonnes of iron ore from its Tallering Peak mine in the Murchison district of Western Australia. In tonnage terms, that represents about 10-days exports by BHP Billiton. But, those 1.84 million tonnes were worth A$77.4 million, and the gross profit margin was 37.3 per cent, which meant A$28.9 million stuck as operating profit, and A$23.6 million as after-tax profit – and that was without the benefit of the 71.5 per cent price hike for the full year.
This year, Mt Gibson will crank up production at Tallering Peak to 2.5 million tonnes, and then 3 million in 2007, when a second mine (the namesake Mt Gibson operation) starts and group annual production rises to 4.5 million tonnes, a level which management expects to maintain for at least 10 years. At 4.5 million tonnes Mt Gibson is still a blink in the eye of the mega-miners which ship out 100 million tonnes (plus) a year. But, with the full benefits of the 71.5 per cent price hike, and with more to come, it is reasonable to see Mt Gibson posting a profit of around A$30 a tonne, which implies earnings from 2007 onward of more than A$135 million – and that for a company currently capitalised on the Australian market at just A$330 million. Some investors have woken to the Mt Gibson story, pushing the stock from A20 cents at this time last year to A88.5 cents today (October 3). Mt Gibson chief executive, Brian Johnson, told Minesite that making a fast start on sales was the key to success in the current high-priced iron ore climate. “We have kept capital costs to a minimum, using contract crushing, and then road trains to haul the crushed ore 65kms to a railway siding. From there it is railed to port and exported.”
The trucking option is likely to be taken to its full extent by Iron Ore Holdings (IOH), a newly-floated business run by a former senior Rio Tinto executive, and former director of Consolidated Minerals, Malcolm Randall. His plan is to develop quickly a mine based on a pisolite (pebble-like iron) resource, trucking it an estimated 200km to Port Hedland. “We’ve calculated that we can make a profit of A$10 a tonne, even by using road transport,” Randall said. “The start-up size really doesn’t matter, we could make money at 200,000 tonnes. At that level we would still be banking A$2 million and we’d be in business.” Since listing its A20 cents shares in May, Iron Ore Holdings has risen to trade this week at A97 cents.
In a perfect world, Johnson and Randall would prefer the cost efficiencies of a railway. But time, in this case, is very much money and the game is to get the business going in any way you can even if that means trucking your iron to port on public roads. Midwest is taking the same step having awarded a trucking contract in July, and should be shipping out its first tonne of ore before Christmas. Murchison Metals should be next cab off the trucking rank having announced on September 22 that it has sold an extra 540,000 tonnes of iron ore to the Tangshan Danyang steel mill in China, lifting first year sales to 1.19 million tonnes with shipments scheduled to start early next year. Since mid-July, Murchison’s share price has risen from A27 cents to A41 cents.
Rushing to catch the market is the name of the game for the mini-miners, each of which plans to get bigger in some way, either through increased direct shipping, or by some-form of value-adding such as converting low-grade magnetite ore into pellets. Those next steps are expensive, but once a business is underway the bigger picture is easier to fulfil. It is this simple difference which explains why the small iron ore miners are attracting as much interest in the Australian market as companies trying to start at the top end of the game with billion dollar (plus) projects which are harder to finance, and which rely on access to rail and purpose-designed port facilities. The mini-miners really are bringing to life that old snooker adage that little fish are sweetest.
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