Interesting story posted by another user on the ironore thread. MGX coverage included at the bottom. Nothing new really - same reasons why I intially bought in to MGX. Still good to hear analysts backing it up.
Iron Ore A Five Year Story FN Arena News - November 22 2007
By Greg Peel
The analysts at Goldman Sachs JB Were have pencilled in an expected 30% increase in the price of iron ore for Japanese financial year 2008-09. Negotiations for the new contract price are expected to be completed by February, but there are no guarantees. This year might see a protracted contest.
Indeed, Weres would not be surprised to see up to a 50% price increase - which brings the analysts in line with other such as Macquarie's - given the extraordinary differential between the cost of Indian, Brazilian and Australian ore sold in China. Lower quality Indian spot iron ore is trading at a 40% premium to Brazilian and a 120% premium to Australian iron ore (including freight cost).
Australian producers - read BHP-Billiton (BHP) and Rio Tinto ((RIO)) - will be fighting hard to bring Australian prices in line, and with spreads of 120% one would expect even a rise of 50% looks very reasonable. The problem is, however, that a lot of the price differential is to do with a longstanding arrangement the Australian have with the Chinese over who bears the cost of the freight. The Chinese do not like it when people go back on their arrangements, and so will be intent on maintaining the status quo.
Given that the top three global iron ore producers - BHP, Rio and Brazil's CVRD - control 65-70% of the global market, one would think our guys would thus have a bit of clout - tradition or no tradition.
What BHP and Rio will not want is for the US to go into recession and for China to see a notable slowdown in steel demand, just about the time final prices are on the table. We can argue all day about whether this might happen but the reality is still that China is towards the beginning of its great industrial awakening, not the end. Thus while there may be swings and roundabouts, Chinese growth is running at 11-12% so there has to be a big slowdown to feel any major impact. Weres notes global steel production grew at 1.5-2.0%pa over the 1990s but since 2000 has averaged 8%pa. The difference, of course, is China. And Chinese domestic consumption is now on the rise, so its economy is not so entirely dependent on the US.
The price rise in 2006-7 was a massive 71.9% jump, when China's accelerator really hit the floor. In 2007-08 the price negotiations were very swift, indeed they were over by December 2006 and the increase was only 9.5%. In retrospect, notes Weres, the buyers got off very lightly. But in the meantime, apart from an ongoing demand surge, supply lines have reached the extent of their capacity. Overseas freight costs have gone through the roof, as has the cost of expanding existing strained infrastructure. Australia has quite a case to argue.
Weres believes that over the next three years this will continue to be the same story. Demand for iron ore will grow at around 10%pa but miners will struggle to increase production. However by 2010, supply will begin to catch up. By 2013 the numerous planned iron ore projects and expansions will come on stream and the likes of Fortescue Metals ((FMG)), Murchison Metals ((MMX)) and CSN should reach a meaningful presence in the seabourne market.
By that stage, says Weres, the world could well go into oversupply.
Having said that, Weres has initiated coverage of two Australian iron ore companies this morning.
The former - Mount Gibson Iron ((MGX)) - has already drawn a good deal of attention as it has been dragged along in Fortescue's wake, rising 90% in value since August.
Mount Gibson is already producing iron ore in Western Australia from two of its three operations, and has expansion plans in place. Weres likes the story, but of course the ship has already sailed to some degree. The analysts have initiated with a Hold rating and a target of $2.58, suggesting investors look for a pullback before jumping on. (The stock has fallen 6% today to $2.36).
The latter is the lesser known Sundance Resources ((SDL)) which has large prospective iron ore reserves in Cameroon. The project is a long way off production, but it is enormous and features very high grades. The stock had fallen from around 80c to 47c but unfortunately Weres initiation with a Buy has seen it shoot up 15% today. Still, that's only 54c compared to Fortescue's $54. Weres has set a 12-month target of 70c.
MGX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)