PORTFOLIO POINT: It’s plan to treble output of haematite, the higher-quality iron ore, would
wreck the prospects of small magnetite producers.
When elephants fight smaller animals run for cover. It’s the same in the corporate world, which an
entire sub-sector of the iron ore business is about to discover as it becomes potential “collateral
damage” in the battle between Rio Tinto and BHP Billiton.
Yes, the BHP move on Rio is good for iron ore stocks but only haematite iron stocks. For magnetite
iron stocks, it's very bad news. And the magnetite iron sector houses some of the best known punters’
favourites in the mining industry. There's Gindalbie Metals and takeover target Midwest Corporation,
along with Atlas Iron, Cape Lambert Iron, Grange Resources, Australian Resources and Goldstream
Mining. If you have bought – or are about to buy into – any of these stocks think, again. Here's why:
Magnetite miners were already in trouble but this week's Rio Tinto defence has loaded the odds
against them. Rio has revealed plans for a spectacular increase in the production of haematite,
possibly trebling output from about 200 million tonnes a year to more than 600 million tonnes, with 420
million tonnes coming from the Pilbara region of WA.
That expansion, which represents a dramatic acceleration of mine development plans, is designed to
give Rio Tinto a bigger slice of the world iron ore market than it already has. However, it also means
much less room for new, high-cost, miners – and the newest and highest cost are the magnetite
hopefuls.
Put simply, magnetite is an inferior ore to haematite –and it's haematite that's preferred by the world’s
major iron ore exporters, including BHP Billiton, Rio Tinto and the big Brazilian, Companhia do Vale
Rio Doce (CVRD) – and, from next year, Fortescue Minerals.
Why are the magnetite miners heading downhill?
• The ore itself contains much less iron. Typically, haematite grades 55–60% iron, while
magnetite is 30–35%.
• Processing magnetite involves physical separation of the iron and the waste rock, and then
intense heating, before conversion to a semi-finished product such as high-value pellets.
• While the physical separation process is easy (as the name implies magnetite is strongly
magnetic), the heating requires very large amounts of energy – a luxury at a time when the oil
price is approaching $US100 a barrel, and coal prices are rising in sympathy.
• The capital cost of magnetite processing is also high. None of the planned projects in Australia
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