Long Term Iron Ore Price

Although the‘market’ clearly does not agree with me, I am of the view that day to dayfluctuations in the iron ore price should not impact the day to day price ofiron ore stocks. It is the long term iron ore price (underpinned by the longterm demand and supply curves) that should be assumed when both companies andinvestors make their fundamental long term investment decisions.

So why am Iraising this issue? Because I think it is bleeding obvious that there will be short supply in the iron ore market over the next 10 years – which will obviously have a positive impact on iron ore producers and will benefit the up and coming junior iron ore companies like AKORA.

Take theexample of Vale – the world’s largest iron ore producer. From a record 2018production level of 384.6mmt, Vale’s annual iron ore production has beenfalling in recent years.

OnDecember 7^th, Vale released its near term and long term productionforecasts. Vale currently forecasts production of just 310 mmt for 2022 and 310-320 mmt for 2023, well below the 384.6 mmt record achieved in 2018.

Vale has also cut its long-term 2026 iron ore output guidance to340-360 mmt (much lower than the 400-450 mmt production forecast Vale itself madefor that year one year earlier), and its 2030 onwards guidance is 360+mmt. Vale management explains that the forecast reduction in production will be attributed to a variety of reasons. For example, permits have not been obtained as expected, and Vale now does not expect granting of operating permits to be routine.

It is now clear that future production from Brazil will besignificanly less than what the market and Vale itself has assumed.

If you analyse the Dec 7^th Vale production forecast, you should conclude that from 2019 to 2030 Vale’s iron ore output will fall short by ¾ to 1 billion tonnes from which it has previously indicated, which in turn will put great pressure on iron ore markets.

On the demand side, Vale is forecasting steel demand growing overthe next 10 years based on emerging regions and megatrends - fueled by populationand economic growth, urbanization, onshoring and energy transition.

To fill the ever increasing demand for steel, when do the Australian iron ore producers start replacing existing production with new mines rather than growing production? And can it be done before 2030?

In summary, the long term price outlook for iron ore is verypositive. Production shortfalls will ensure that the long term price will besignificantly above US$100/t. It is my view that Akora’s projects willeventually be developed assuming better than current iron ore prices. If theprojects are not developed by Akora itself, then they will be developed by anacquirer of Akora – with the acquirer having to factor in a high iron ore pricewhen pitching its bid.