sell magnetite shares now: broker

Sell magnetite shares now: broker
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Tuesday, 2 August 2011
GET out of Western Australian magnetite hopefuls now. That is the blunt message from one of Asia?s top brokers as it assesses the likely victims of the inevitable end of the iron ore boom. The Metal Detective by Stephen Bell

WA?s listed Mid West magnetite players have endured a shocker 2011, with Gindalbie Metals and Murchison Metals both down roughly 40% in the year to date.

Industry cost blowouts, major delays and infrastructure challenges have seen many investors lose patience with the magnetite story, despite the lure of near-record iron ore prices.

But the worst is yet to come, says CLSA Asia-Pacific Markets, a part-owned broking unit of French bank Credit Agricole.

The Hong Kong-headquartered broker recently initiated coverage on several WA junior iron ore miners.

It didn?t pull any punches in the magnetite space, slapping a sell recommendation on Murchison Metals, with a target price of 38 cents a share ? less than half the current value.

This one didn?t totally shock the Metal Detective, as several others have jumped off the good ship Murchison after it revealed last month it would struggle to fund its share of the A$5.94 billion Oakajee project.

But CLSA was even more savage on Karara developer Gindalbie ? its 22 cents a share price target is 70% below the current price.

In contrast, Chinese takeover target Sundance Resources ? the other WA-based junior chaired by George Jones ? rates as outperform, based on its assumed low cost hematite production out of a greenfields site in west Africa.

WA magnetites don?t make the grade as they sit at the top end of both the capital and operating cost curves, says Sydney-based CLSA analyst Hayden Bairstow.

?Some [magnetite producers] may make profits, but not after accounting for the cost of capital,? he told MD.

?They are just not going to make an economic return.?

Included in that category is Citic Pacific?s $US6.1 billion Sino Iron project, which recently unveiled another $US900 million cost blowout alongside further delays.

CLSA also takes a more bearish view on long-term iron ore prices than many other crystal ball gazers in the broking fraternity.

It predicts long-term prices of $US60 a tonne, just one-third of current spot prices, with the lower prices kicking in from 2016 as the global miners start ramping up their multibillion dollar expansions.

CLSA?s bearish call is even more notable, given that several other brokers are slowly revising forecasts upwards, reflecting the continued tight market this year.

JP Morgan, for instance, recently bumped up its long-term prices by $10/t to $80/t and said it was ?delaying the start of the decay into normalized prices? to 2014 ? a year later than previously.

JPM tips that iron ore will average $140/t in 2014, falling to $120/t in 2015, and gradually declining beyond that.

All educated guess work, of course.

Nobody, not even MD, can predict the future.

You might be better off tossing darts at a board while blindfolded, and drunk, in the Palace Bar.

But the magnetite players will be praying that JP Morgan?s more bullish prognostications hold water.

Gindalbie, for instance, predicts Karara?s operating costs will be in the range of $A65-68/t ? sufficient to earn some profits even at $80/t iron ore.

The billion-dollar question is how long it will take for the weight of new global production to tip prices below the magic $100/t mark, which would place the magnetites on much shakier ground.

JP Morgan is not too fussed on this point, arguing that bringing new capacity on stream remains a ?huge challenge? in the current escalating cost environment.

?We estimate that, on a cumulative basis, around 280Mt of promised junior mining capacity was delayed in a period of just one year,? the broker said.

?Without this new capacity, prices should stay supportive for a longer period of time.?

On the demand side, China keeps rolling along, taking over juniors, building expensive magnetite projects and getting its hands on new high-cost production.

Some economists argue that China?s staggering urbanisation spurt ? its economy is forecast to grow by more than 9% this year ? isn?t sustainable in the long term, because it is based on investment in infrastructure rather than consumption.

But Global Mining Investments, Australia?s biggest listed mining investment fund, remains a firm believer in China, arguing its inflated economy is probably an easier situation to manage than the US?s current malaise.

America, of course, is highly dependent on consumption, which has proved much harder to switch back on after the GFC, given people?s pessimism about the economy and the outlook for housing prices.

?China?s in a situation where you?d think, logically, that it would move in the direction of other countries and gradually increase domestic consumption,? GMI chairman John Robinson said.

?And that would give a much more balanced economy that is not so reliant on exports. There is no reason to believe that China won?t manage that effectively.?

Of course, Robinson is partly talking his book, given that GMI is heavily weighted towards the global diversified miners, Rio Tinto, BHP and Vale, all heavily reliant on Chinese demand.

All three are also low down on the cost curve and conspicuously absent from the beleaguered magnetite space.