Thursday, October 27, 2005 YOU know a commodity is hot when brokers devote an entire "book" to a particular Western Australian region not noted for its mining pedigree. Report by Stephen Bell
If iron ore is the new gold, then the Mid-West district - around 350km north of Perth - is fast emerging as a new iron ore province, says Patersons Securities.
Several juniors are putting paid to the "economies-of-scale stereotype" long associated with iron ore by developing medium-scale enterprises for export from Geraldton, it says in its Mid-West Iron Ore Book released earlier this month.
A potential 1 billion tonnes of direct shipping ore has been identified in the Mid-West "arc", with additional magnetite resources in the order of 1 billion tons and growing, it estimates.
The broker reviews four key players - Mount Gibson Iron, Midwest Corp., Murchison Metals and Gindalbie Metals – and concludes that all are capable of "significant outperformance if China's voracious appetite for iron ore remains".
That last point is, of course, the billion dollar question. Currently though, WA's booming iron ore sector can't seem to ship the stuff out fast enough for hungry Asian steel mills.
Only last week, Rio Tinto and BHP Billiton unveiled separate multi-billion dollar Pilbara iron ore expansions on consecutive days.
Old timers familiar with the boom/bust cycle might worry that Australia's two mining behemoths, caught up in the China hype, will be left with spare capacity by the end of the decade.
But adding extra iron ore capacity has proved a licence to print money over the past several years, so why should they stop now?
And both companies are about to begin the annual posturing and debating ritual known as the iron ore price talks. What better way to show customers that demand is booming than by ramming in a few billion dollars worth of new ports, mines and railways?
If you are an iron ore wannabe looking to get up a smallish operation near Geraldton, you will take great comfort from the recent investment decisions taken by the Pilbara gorillas.
They point to a growing confidence in the iron ore market – one so strong that the Asian mills are doing all sorts of deals with the minnows to ensnare supplies outside the Pilbara "duopoly".
Some of those deals will do doubt evaporate into a cloud of red dust when projects don't stack up for one reason or another.
But the willingness of groups such as Sinosteel (Midwest's partner), Shougang Group (Mount Gibson) and Korea's POSCO (Murchison) to wade into the Mid-West shows how eager they are for alternative supplies.
It is also a good sign for investors looking to take a punt on the price talks, which traditionally kick off next month with meetings between Japanese steel mills and the big iron ore producers.
The consensus seems to be that prices will rise again, despite recent comments by the Chinese that they hope to negotiate off their own bat for a 5-10% price cut.
Earlier this month UBS – previously bearish on iron ore prices - said it expected another 10% jump next year due to the growth of China's steel industry and the sluggishness of new supply.
For its part, Patersons tips a 5% price rise, due to continued demand for raw materials, combined with Australia's "competitive advantage" over rivals such as Brazil.
So if prices are heading up, who is the best dressed in the Mid-West?
As the only established producer, Mount Gibson is an obvious beneficiary of higher prices at its flagship Tallering Peak operation, which is expected to produce 2.5 million tonnes this fiscal year.
But Patersons calculates that Midwest – whose Koolanooka direct shipping project is only months away from start-up– has a "similar" share price leverage to iron ore prices as Mount Gibson.
For instance, a 10% price increase translates to a 13% Net Present Value gain for Midwest and an 18% gain for Mount Gibson.
The leverage is even greater for Murchison, due to the fact that the company is rated as a high cost producer from its proposed Jack Hills project.
Gindalbie is a more speculative play, with its near-term fortunes resting on the results of a large drilling program at its Blue Hills hematite project.
The recent board appointment of former Portman chairman George Jones drew plenty of media attention to Gindalbie, ensuring that the progress of Blue Hills will be closely watched.
Of course, Geraldton's iron ore rush faces a few major infrastructure hurdles.
Patersons estimates that Midwest Corp.'s Weld Range project, for instance, potentially houses 400 million tonnes-plus of ore - enough to underpin a 25Mtpy operation over two decades.
That scale of mine would require a 350km rail line and a new deepwater port at Oakajee, 30km north of Geraldton.
Last year the WA Government reaffirmed its in-principle support for Oakajee, which was first mooted in the Kingstream era of the late 1990s.
Whether it is prepared to stump up the lion's share of the estimated A$1.5 billion capital cost remains to be seen.
Iron ore mining is a capital intensive business and not all of the current crop will get over the line.
But unlike Andrew Forrest's Fortescue Metals, the Mid-West hopefuls are not fighting powerful vested interests trying to protect their patch.
Let's hope that the trickle of iron ore coming out of Gerlaldton soon turns into a much bigger stream running all the way to China.
MGX Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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