the next fortescue

Eurekareport.com.au
The next Fortescue?
By Tim Treadgold
PORTFOLIO POINT: Strong, and rising, iron ore prices have strengthened the prospects of at least five
miners, apart from the much-watched Fortescue Metals.
Investors could be forgiven for imagining that the iron ore boom is all about a human headline called Andrew Forrest, the chief
executive of Fortescue Metals. But if they can peer past that story they will find that iron ore is much more than a single largerthan-
life character who has amassed a $3 billion paper fortune virtually overnight.
Not all of the iron ore hopefuls are as "colourful" as Forrest (did someone say ‘thank goodness’?). But there is plenty of appeal
in the hidden but dusty gems waiting to be discovered in what was once a rather boring business of digging up red dirt in WA’s
remote Pilbara region and shipping it to Japan.
Before naming names, consider the question of what’s changed. What has made iron ore, a lacklustre industrial mineral, more
attractive as an investment than commodities with much brighter reputations, such as gold, diamonds, and platinum? The
correct answer is a triple header: price, tonnage and trend.
Over the past six years, thanks to China’s insatiable demand for steel, iron ore prices have surged sharply higher. A tonne of
the stuff in 2001 would have cost you about $US25. Today, it will cost you about $US75, depending on quality, grade and
obscure facts such as impurities in the ore.
Of equal importance to price is tonnage. China is buying vast amounts of iron ore, and that plays right into the hands of
producers, who are clever users of transport logistics such as industrial-sized shovels, trucks, railways and ports. As the
outgoing boss of BHP Billiton, Chip Goodyear, says of his company’s biggest asset: "We’re really good at shifting dirt."
Combine rising price and rising tonnage with relatively static costs, thanks largely to the "de-unionisation" of the iron ore
industry in the 1990s, and you get fabulous profit margins of 50% and more on sales, a margin that most miners and
manufacturers would die for.
But, it’s the third force in iron ore (to borrow a Forrest slogan) that makes shipping red dirt irresistibly attractive: the trend.
Rather than suffering from a price that looks "peaky", like copper, zinc, nickel, and most other minerals, iron ore is looking at an
upward trend – for both price and tonnage. In other words, the world wants more, and is prepared to pay more.
The three-year outlook, and perhaps much longer, makes it worthwhile hunting for stocks with the potential to mimic, albeit on
a smaller scale, Fortescue’s remarkable share price rise from $6 to $34 over the past 12 months. A performance that flew in
the face of intensely negative media reports, a complete lack of institutional investor support, and a debilitating investigation by
the corporate cop, the Australian Securities & Investments Commission into things Forrest said about sales contracts almost
two years ago.
It is a share price performance that may make it possible for Forrest to complete a $US1 billion raising, which the company
confirmed earlier this week. What’s good for Fortescue is also good for the crop of iron ore hopefuls, some in production, some
on the verge, and some with a vision as bold as Forrest’s.
Five names to remember are: Atlas Iron (AGO), Gindalbie Metals (GBG), Sundance Resources, BC Iron (BCI) and Murchison
Metals (MMX). Other names worth noting are Midwest Corporation (MIS) and Sphere Investments (SPH) – though both have
enjoyed recent strong market support and have perhaps done their best work for now.
Blips on the iron ore radar include Golden West Resources (GWR), Polaris Metals (POL), Warwick Resources (WRK), Batavia
Mining (BTV), and Goldstream Mining (GDM). Each has a viable story to tell, but hasn’t everybody when the profit margin on
your product is 50%!
Here’s what really matters:
• The price outlook. This is an astonishing factor when it is considered that the world is six years into a resources
boom. If history was an accurate guide the iron ore price should be falling under the pressure of Adam Smith’s
invisible hand; that immutable law of supply rising to meet demand. This time around supply is struggling to meet
demand thanks to China’s industrial revolution, and rather than tipping a price fall the experts are tipping more
increases next year. Citigroup says 20% Goldman Sachs says 9%.
• The supply/demand outlook. All producers are rushing to expand production, but there simply is not
enough capacity to satisfy demand, not yet. In time, that will change. But building a new iron ore
project takes years and China alone is demanding the equivalent of a new Fortescue (and its firststage
target of 45 million tonnes) every year just to keep its blast furnaces full. The boss of Brazil’s
iron ore giant CVRD, Fabio Barbosa, said last week that: "This is a cycle of prosperity much longer
than we had previously imagined."
• The metal intensity of China’s revolution. This fact underpins the demand side of the equation
because China is in a high metal-use phase of its transition from a rural to an industrial economy.
• Cracking the oligopoly. High profit margins make the shareholders happy, but deeply annoy the
customers. This is a big factor in China (and Japan) actively encouraging new producers, such as
Fortescue, so they can boost supply, hop more widely, and possible drive prices down.
Here are the possible contenders as the next Fortescue:
Gindalbie Metals (90¢): Once a small gold producer, Gindalbie struck it lucky when it realised that on the southern end of its
mineral tenements near Geraldton on WA’s mid-west coast was a large iron ore resource. Within months of closing (and later
selling) its Minjar gold mine, Gindalbie had "morphed" into an iron ore player. A major management shuffle followed with
company founder David McSweeney making way for former Portman boss, George Jones.
Jones has been the driving force behind the development of close ties with the Chinese steel producer, AnSteel, which on
June 4 bought a 13% stake in Gindalbie and will be the major buyer of the company’s mix of high grade, direct shipping ore,
and lower grade magnetite ore which will be converted into blast furnace feedstock in China. Two years ago Gindalbie was
trading at 8¢. Today it is 90¢.
Sundance Resources (47¢): One of the brave new breed of Australian miners prepared to tackle the challenge of Africa,
Sundance has its foot on an A-class iron ore deposit in Cameroon. Discovered almost 30 years ago by geologists working for
the United Nations and a Canadian Government aid agency, the Mbalam ore body is already known to contain 218 million
tonnes of premium material. Getting it to a port and then to a market has always been the challenge (not to mention the risk of
investing $2 billion in central Africa).
Times change, prices rise, Africa has become less daunting, and Mbalam is now the subject of a major drilling campaign,
which Sundance believes will yield a billion tonnes of iron ore, and permit the development of the project which looks awfully
like that of Fortescue – but with an African flavour.
BC Iron ($1.83): Not named after the time in which its rich "channels" of iron where formed in the Pilbara region several billion
years ago, but after one of the structures, Bonnie Creek, BC is an unusual beast, formed by the merging of adjoining
tenements held by Consolidated Minerals and Alkane Exploration. Recent drilling has delivered excellent results, including a
nine metre zone assaying 59.2% iron.
Channel iron, which is precisely what it sounds like, is found in ancient river beds. It is generally easy (cheap) to mine, and sell.
BC’s appeal lies in its share price. At $1.49 the company is capitalised at just $35 million, a round of drinks in today’s iron ore
world (or 1% of Forrest’s personal wealth). As drilling continues BC will either become an irresistible takeover target, or actually
find a way to get its product to a port.
Atlas Iron ($1.35): One of the real success stories in the sector over the past few weeks, Atlas scored a big win on June 11
when it announced a deal with Fortescue that will allow it to ship ore across Fortescue’s new Port Hedland wharf. In a delicious
twist of the sometimes convoluted world of iron ore politics, Fortescue’s helping hand was in direct contrast to the way it has
been treated by BHP Billiton and Rio Tinto. For Atlas, the port deal means it can now move quickly to start a small export
operation based initially on the Pardoo project near Port Hedland, possibly followed by a second direct shipping mine on the
Abydos deposit, and then think about a much bigger magnetite operation with a price tag in the billions – and perhaps best
suited as a spin-off to Chinese investors.
Murchison Metals ($5.25): Once a forgotten star in the iron ore world, Murchison is within sight of achieving the coveted "10-
bag" status of a stock which achieves a 10-fold increase in price. A year ago investors could have snapped up a parcel of stock
at 57¢, and unloaded it today for about $4.03. The upward rush in share price has catapulted Murchison into the ranks of
emerging resource sector leaders with a market capitalisation of $1.7 billion, and potentially with much more to come after
Japan’s Mitsubishi this week agreed to pay up to $3 billion for 50% of the company’s iron ore assets.
Murchison Metals started exporting from its Jack Hills mine in WA in February, has a first target of 1.5 million tonnes a year,
and then onward and upward to 25 million tonnes a year. Another true believer in Murchison is Korea’s biggest steel producer,
Posco, which has taken a 12% stake in the company.