Fab four iron ore juniors get a leg upBy Tim TreadgoldJune 10,...

Fab four iron ore juniors get a leg up
By Tim Treadgold
June 10, 2009

PORTFOLIO POINT: Four iron ore juniors are set to benefit from increased customer, government and investor support in the shadow of the BHP-Rio joint venture. Beating Chinalco to Rio Tinto’s iron ore assets was a big win for BHP Billiton, if the deal can overcome worldwide objections and be completed. However, the real winners, whether the BHP/Rio deal is finalised or not, are small iron ore companies that have been handed a triple victory in the form of increased government, customer and investor support.

The challenge to making money from the new order in iron ore is “separating the wheat from the chaff� in a crowded market, and knowing which projects are likely to succeed and which are not. A starting point is to assign the lowest value to any company proposing to process magnetite ore, a technically appealing material but one that requires heavy capital investment upfront and uses large amounts of power to separate the iron from waste rock.
Second lowest are those projects that are too remote to be developed quickly. Most projects in the middle of Africa will be exceptionally hard to fund and build, no matter how high the ore grade. An easy solution to sifting through the 20-or-so iron ore hopefuls is to “buy the alliance�, a four-member lobby group formed mainly to argue the case for easier access to railways and ports in WA’s Pilbara region, with each company having the essential ingredients for quick success: high-quality ore in the ground, strong management and the ears of government and customers.

Officially known as the North West Iron Ore Alliance (NWIOA), it is made up of Atlas Iron, BC Iron, Brockman Resources and FerrAus.
Since last Friday (June 5), when BHP Billiton and Rio Tinto announced the creation of their controversial joint venture, the four juniors have been attracting increased attention and one, Atlas, has used this revitalised interest to seek a reported extra $120 million in capital.
Another, BC Iron, has seen its share price rise by 65% to $1.03 after announcing a deal that gives it access to the railway and port of Fortescue Metals Group.
The other two, Brockman and FerrAus, have performed well, though not as well as BC. Brockman has risen by 16% to $1.22 and FerrAus by 42% to 42¢.

Atlas chief executive David Flanagan described the BHP/Rio deal as “beautiful�. He says: “It’s given us additional leverage in the game, and generated a lot of increased investor interest.�

Just how much increased interest can be measured in a Buy note that Merrill Lynch sent to clients on Monday, lifting the broker’s price target for Atlas from $1.55 a share to $2.50 for several reasons, including: Chinese interest in acquiring more ore such as the Ridley magnetite deposit owned by Atlas; and improving economics of Atlas’s Abydos and Mt Webber projects.

Mike Young, chief executive of BC Iron, echoed Flanagan’s optimism, describing his joint venture with Fortescue as a company-maker for BC. “It’s an excellent deal with plenty of growth potential,� he says. George Jones, chairman of Gindalbie Metals, who is in Beijing, says he anticipated an increased urgency from Chinese steel mills to encourage the development of alternative sources of iron ore supply. “We’re locked in with AnSteel, but BHP teaming with Rio Tinto will accelerate demand for iron ore from the juniors,� he says.
Brockman chairman Ross Norgard says he expects the WA Government to apply more pressure on BHP Billiton and Rio Tinto to open their railways and ports to third-party miners. “This really could be a chance to open the system,� Norgard says. The primary appeal of the four-member alliance, apart from making stock selection easier, is that they are located in the heart of one of the world’s major deposits of iron ore, have extensive tenement positions, and have the triple-header benefit of active support from government, customers and investors.

They are, in effect, neighbours to BHP Billiton and Rio Tinto; much of their ore is located in identical geological structures, which makes it easy for customers to use. As an investment “quartet�, the four-member alliance has a lot to gain from likely changes in the way the iron ore industry works.
Those changes could start with new government rules, including a demand that railways and ports be opened if legally binding state agreements are to be rewritten to enable BHP Billiton and Rio Tinto to maximise the savings they are seeking from jointly run operations.
The WA government has flagged its extreme disquiet over the BHP/Rio deal, especially in the way it seeks to avoid up to $1 billion in stamp duty, making it important that BHP Billiton and Rio Tinto make some form of peace offering when asking for the state agreements to be re-written.

A similar tradeoff will be required to win approvals from European and US anti-monopoly regulators. Customers, especially Chinese steel mills, are lining up for their chance to hit back at the BHP/Rio deal and although they might not be able to derail it, there is no doubt the mills will offer incentives to rival miners.
It’s early days for the “rail access� alliance, but by 2013 the four member companies have the potential to be exporting up to 50 million tonnes of iron ore a year between them, roughly the same as the first stage of Fortescue’s existing operations.

In time, it is even possible to see the alliance members merge into a single entity to achieve greater economies of scale, although that thought is perhaps too far ahead of today’s game. Without looking into the future it is important for investors to see the change under way in the WA iron ore sector caused by the BHP Billiton and Rio Tinto deal.
Fortescue Metals Group, despite its high and somewhat imperfect record, is an example of the value that can be created with access to a railway and port in the Pilbara. Fortescue has a market capitalisation today of about $10 billion.
Whatever its critics might say Fortescue has succeeded. It has built a mine, railway and port and is now able to elevate its boast about being Australia’s “third force� in iron ore to “second force�. That leaves open the position of new third force and that could be the four-member alliance, Atlas, BC, Brockman and FerrAus.