Iron Ore Forecasts and AGO Profitability

Hi Guys

If you have read my other Thread from this morning you will know I am lucky enough to have a full Bloomberg Terminal for my day job in FX/Rates Structuring.

Today I've pulled out the official IO Forecasts (for what they are worth) from the major economists and contributors to Bloomberg. The table below gives you the high/low/median/mean forecasts out to Q3 2018.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	62%	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018
1	Median	71.00	60.00	58.00	55.45	56.39	54.63
2	Mean	70.33	61.56	57.62	56.28	55.03	53.23
3	High	79.00	77.00	76.00	67.00	62.50	59.00
4	Low	50.00	48.00	48.00	50.00	48.00	46.00

These forecasts are for 62% IO and denominated in USD - the below table takes these forecasts and applies a 10% discount to these (generally discount between 62 to 58 IO is between 7-11% as per AGO March Presentation but has widened a touch of late as high steel prices had producers seeking out better quality IO to use in production). As this demand tapers - part the reason IO has fallen - expectations are that this spread or discount will compress to 'normal' levels.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	58%	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018
1	Median	63.90	54.00	52.20	49.91	50.75	49.17
2	Mean	63.30	55.40	51.86	50.65	49.53	47.91
3	High	71.10	69.30	68.40	60.30	56.25	53.10
4	Low	45.00	43.20	43.20	45.00	43.20	41.40

Assuming an AUD/USD Exchange rate of 0.7500 these USD prices for 58% translate to the following AUD amounts per tonne.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	0.7500	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018
1	Median	85.20	72.00	69.60	66.54	67.67	65.56
2	Mean	84.40	73.87	69.14	67.54	66.04	63.88
3	High	94.80	92.40	91.20	80.40	75.00	70.80
4	Low	60.00	57.60	57.60	60.00	57.60	55.20

And if we take the mid-point of AGO Full cash cost guidance $52-54 AUD (i.e $53) from their March Presentation then we get the following margin made by AGO in AUD per tonne.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	0.7500	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018
1	Median	32.20	19.00	16.60	13.54	14.67	12.56
2	Mean	31.40	20.87	16.14	14.54	13.04	10.88
3	High	41.80	39.40	38.20	27.40	22.00	17.80
4	Low	7.00	4.60	4.60	7.00	4.60	2.20

As you can see even if we see the worst outcome possible (as per forecasts) AGO will still make between $5-$7 per tonne - not great but definitely not company ending stuff.

This $5-7 AUD also assumes the following:
1.) there is no hedging of currency or IO
2.) AUD/USD exchange rate does not fall and remains at 0.7500 (unlikely if worst case IO forecasts play out and we have multi-year stronger USD environment)
3.) AGO cannot improve cost base

At AUD/USD of 0.7000 the profitability looks as follows (margin in AUD per tonne):

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7
0	0.7000	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018
1	Median	38.29	24.14	21.57	18.29	19.50	17.24
2	Mean	37.42	26.15	21.08	19.36	17.75	15.44
3	High	48.57	46.00	44.71	33.14	27.36	22.86
4	Low	11.29	8.71	8.71	11.29	8.71	6.14

I'm sure I have missed things and there are other considerations (like the port issue etc) but if all of a sudden you start believing the forecasts and are starting to panic because the IO market may have caught up to where the 'experts see it' then its worth looking at how this business performs under a 'worst case' scenario.

It doesn't look as bad as the AGO price action of late suggests? Would you agree?

Would love to hear your views

GLTAH