Gindalbie gets a good mention in this report,Interestingly GWR...

Gindalbie gets a good mention in this report,Interestingly GWR get even more attention and currently has a much higher share price than GBG at $1.75 sure GBG will get there one day. R&R


Iron ore’s best bets, By Tim Treadgold

PORTFOLIO POINT: It’s easy enough to find iron ore in Australia. The winners are those than can extract and ship it for the best margin.
Suddenly it's all happening in iron ore – stock prices are soaring (some literally doubling). The industry's new champion, Andrew Forrest, and his Fortescue Metals operation are ready to roll out the first shipment next week and with a price rise of 85% in sight for the base metal the sector is literally firing up.

But a closer look at the investment options in iron ore shows it's not the production of the commodity that matters, but the ability to ship it out of Australia that will separate the winners from the losers.

In fact, finding iron ore in Australia is easy. The hard part, which seems to have been forgotten by some excited company promoters and naive investors, is that success in iron ore has little to do with mining and everything to do with logistics.

That’s why the current boom in small iron ore stocks, and the grand plans of some late arrivals to the party, should be treated with caution because not everyone will be able to deliver their product to market in time to catch the high prices on offer.

Forrest understood the critical importance of access to rail and port infrastructure when launching Fortescue Metals Group five years ago. That’s why he initially demanded access to the BHP Billiton and/or Rio Tinto rail systems, but then decided to build his own, and is today loading the first ore into a small bulk carrier as part of FMG’s commissioning process.

It’s also why Forrest is ranked this year as Australia’s richest person, owning FMG shares worth more than $9.2 billion.

After Forrest, who is also planning a major capital-raising to cut debt plus a possible sell-down to “liquefy” some of his controlling 36% stake in FMG, it becomes important to separate the potential winners from the likely losers, or those who are many years from knowing which they are.

Winners, because they have secured transport facilities and port access, and because they are developing high-grade haematite mines and not (yet) high-cost magnetite mines, include:

• Atlas Iron, which should be shipping small quantities of ore from Port Hedland by October, and has plans to grow rapidly. Over the past month Atlas has doubled from $2 to $4 and Merrill Lynch is tipping it as a $6 stock, yesterday (May 6) it became a “billion dollar stock” in terms of market capitalisation.

• Gindalbie Metals, which should be shipping iron by early next year, and also plans to grow rapidly in association with a Chinese partner Ansteel. Despite having one of its major shareholders caught in the Opes Prime scandal, Gindalbie is also close to doubling in a month, rising from 72¢ to $1.36.

• BC Iron, which is also planning a modest start on mining, with rail and shipping through a piggy-back arrangement using FMG’s facilities. BCI is also in the “almost doubled” category, rising from 92¢ to $1.82 in the past three weeks.

• Mt Gibson Iron, one of the early entrants in the rush to deliver iron ore to China and re-emerging with a multiple mine plan and access to transport and ports. Mt Gibson is up from $2.70 to $3.36.

Possible winners, but late to the party, include Aquila Resources, which this week unveiled an ambitious plan to produce 25 million tonnes of iron ore a year, but needs to build a railway and port; and Brockman Resources, which has ambitious mine plans, but which is yet to decide on a transport system.

Then comes a long list of blue-sky explorers with potential, plenty of speculative appeal, but no firm shipping plans.

FerrAus has high-quality iron ore adjacent to BHP Billiton’s Mt Newman mines, but will need to secure access to the BHP Billiton rail system to succeed, a possibility that is firming as both the Federal and WA Governments increase their demands that private rail and port infrastructure be opened to all comers.

Golden West Resources has a higher-grade iron ore resource near the central WA town of Wiluna, but needs access to transport. That’s why Portman, which is controlled by the US miner Cleveland Cliffs, and which already exports through the southern port of Esperance, snatched a 10% stake in Golden West during the Opes Prime stock sell-off. Over the past month, Golden West has risen from 92¢ to $1.64.

An important point for investors to note is that all of the companies in the “most likely to succeed” category have haematite ore as their priority product. This is not only the highest-grade ore of iron, it is easier to mine, requires minimal upgrading (if any) and is easiest to market.

Magnetite remains a devilishly difficult product for Australian miners. It is the most commonly used iron ore, but it is traditionally a “mine-to-furnace” material, not suited to transport over long distances because of its lower grades and increased bulk. The best example of that is the switch made last year by OneSteel in South Australia, which converted its Whyalla blast furnace from haematite to magnetite so it could export the haematite and cash-in on China’s demand for iron ore while using the low-grade magnetite in its domestic operations.

There are two other examples of the rush into haematite to catch the boom before it fades, and the slow (if any) progress on magnetite. On Monday, Gindalbie said it would spend $10 million looking for up to 100 million tonnes of haematite even though a big magnetite project is said to be the ultimate focus; and last month Atlas said it too wanted more haematite before adding a magnetite phase to its operations.

Haematite is sometimes called “direct shipping ore”, a name that could easily be translated into “fast buck”. Its high grade and easy handling means it commands a premium price.

The iron ore mining project that best illustrates the logistics dilemma facing all players in the game is not in WA, but South Australia. The Cairn Hill mine of IMX Resources will start exporting a modest 1.26 million tonnes of magnetite each year to China – but not from a port in SA. IMX is railing its ore 2000 kilometres north to Darwin, which has an iron ore export berth and is already handling material from the Frances Creek mine of Territory Resources.

Material from Cairn Hill is attracting a premium price thanks to a high level of copper, which will be extracted in China. However, the fact remains that the ore has to be railed across vast tracts of Australia to find a suitable port.

Other companies have attractive mine development plans, and all are being inundated with offers of capital because the profit margins in iron are high, thanks to Chinese demand and a relatively slow response to meet that demand by the world’s three major iron ore exporters: BHP Billiton, Rio Tinto and Vale of Brazil.

This cosy, three-party iron ore oligopoly, has done as much as China to push the price of iron ore into record territory by effectively limiting supply, a heel-dragging game that has infuriated the Chinese and triggered their wholesale entry as investors (as well as customers) into the Australian iron ore business. Iron ore prices are already set to increase by 70% and could rise by 85% if the “freight differential” premium can be extracted from the Chinese in coming negotiations.

In its drive to secure iron ore supplies, China has taken some remarkable steps such as buying a 10% stake in Rio Tinto (possibly as a blocking stake to prevent its acquisition by BHP Billiton), and by winning board backing for the controversial takeover of Midwest Corporation, a small WA-based miner.

Such is the desperation in China for iron ore that it seems likely that its steel mills (under government direction) will cave in to demands from BHP Billiton and Rio Tinto, that Australian ore should command a higher price than product shipped from Brazil and India because of lower freight costs – the so-called freight differential.

If that happens, Australian miners will win a price rise of about 85% for ore shipped this year, putting them well ahead of Brazilian rivals who have already secured a 70% price increase.

Because there are so many commercial and political issues swirling around the iron ore industry, it is not possible to cover all developments, but, some of the more interesting potential changes ahead include:

• FMG hitting the notional $100 per share price forecast from Charlie Aitken 12 months ago (see Fortescue: blue sky miner). Because of a 10-for-one share split last year, it will achieve Aitken’s $100 milestone when it gets to $10 a share. Today, Fortescue is trading about $9.15 (or $91.50 on a pre-split basis) thanks to the effective completion of its $3.5 billion project, and its imminent entry into the iron ore export business. Trial ship loading is under way, and commissioning of the mine and rail is almost complete. As it moves through the start-up phase and proves it can deliver, a major capital overhaul is likely, with management keen to reduce more than $2 billion in debt and replace it with equity. This could mean a big rights issue, with Forrest taking the opportunity to sell down some of his one billion shares. More equity in the business would also put Fortescue in a stronger position if Chinese customers question the quality of the company’s initial shipments of iron ore (an approach previously used by Japanese steel mills), and an attempt to cut the price by claiming excess quantities of silica, phosphorous or alumina in the ore.

• The rise of Atlas from relative obscurity as it completes a $100 million capital raising, accelerates its export plans via the common user berth at Port Hedland, and plays the “Forrest” card by demanding access to the old Goldsworthy rail line of BHP Billiton which runs past the front door of its first mine.

• The recovery of Gindalbie from negative publicity during the Opes Prime stock sell-off, and a decision to boost reserves of haematite ore through a major new exploration program. The haematite decision could be recognition that new bulk port facilities near the west coast port of Geraldton will take longer to build than currently expected.

• The late entry of Aquila as a serious iron ore player. A quiet achiever through its coal interests in Queensland Aquila’s chief executive, Tony Poli, has a reputation of delivering on his promises. He has a job ahead in hitting his target of 25 million tonnes of iron ore a year with the $3.9 billion plan calling for a 160 kilometre railway and new port at Cape Preston, possibility in association with other would-be exporters.