This post from King Louie over at the Ironore thread on HC is extremely interesting and well worth a read you little Ironorers... Note: FMG looking at a magnetite project and comments about magnetite having it's day, also GBG featured and other mid-west players:
IRON ORE MARKET LEADS THE RESOURCES CHARGE - 03 December 2007
The world's steel hungry economies are growing ever more voracious � and that is excellent news for companies with iron ore prospects and mines. Benchmark prices are set to rise again in 2008 and several Australian iron ore projects are set to begin, or expand existing, production in the next 12-18 months.
The market capitalisation of Western Australian listed companies increased by 5.5 per cent to $160 billion in September with iron ore plays leading the pack, according to the Deloitte WA Index.
In October, miningnews.net published its list of best one-year returns across minerals and energy stocks. The top four rated stocks were iron ore companies and there were another three included in the top ten.
Such healthy market conditions have led to merger and consolidation activities, buoyed by some powerful new alliances with Chinese and Japanese buyers. While this environment may be propelling some of our junior iron ore explorers closer to the big league, the long-term challenge is to make it to production stage in a capital intensive industry like iron ore, picking the right product that will sustain demand and having the right people on board for when times get a bit tougher.
Industry update
Unless you've had your head in the sand for the last few years, you will know that China has emerged as the major buyer of iron ore to feed its steel industry. In fact, according to the Australian Commodities report for the September 2007 quarter from the Australian Bureau of Agricultural and Resource Economics (ABARE), China is expected to account for more than 55 per cent of the increase in world steel consumption in 2007/08, with crude steel consumption forecast to grow by 13 per cent to 448 million tonnes in 2007 and by another 10 per cent to 493 million tonnes in 2008.
On a global scale iron ore production is forecast to rise by 8 per cent to 1.59 billion tonnes in 2007 and a further 8 per cent to 1.72 billion tonnes in 2008. Of this, Australian iron ore production is expected to increase by 24 million tonnes to 288 million tonnes in 2006/07 and is forecast to rise by nearly 30 million tonnes to around 317 million tonnes in 2007/08.
The iron ore market has traditionally been dominated by giants Rio Tinto and BHP Billiton (BHPB). Rio Tinto has expanded Australia's largest iron ore mine, Yandicoogina, to now produce 52 million tonnes per annum (mtpa). Meanwhile BHPB made a record production result for iron ore in the September 2007 quarter, and is progressing its Rapid Growth Project plans at Yandi, with the aim to increase production from 42 mtpa to 45 mtpa beginning in the first half of 2010.
Such high demand for iron ore is also providing an opportunity for junior explorers and producers to get a foot in the door, often with powerful partners supporting their projects.
When it comes to iron ore, Western Australia is where it is all happening. According to data from the Australian Bureau of Statistics, exploration expenditure on iron ore was up by $34.8 million or 64.4 per cent, with the biggest increase occurring in Western Australia.
The Mid West region is shaping up as the State's second major iron ore region after the Pilbara. There are currently three iron ore operations in this area � Midwest Corporation's Koolanooka iron ore mine, Murchison Metals' Jack Hills Stage 1, and Mt Gibson Iron's Tallering Peak.
While there are seven more operations in various stages of definition in the region, the Western Australian Government released a strategic review of the Mid West in late October highlighting the importance of balancing mining and community interests with conservation.
While the Government said it had a �predisposition� towards developments in areas including Jack Hills, Weld Range, Tallering Peak, Yalgoo and Wiluna West, it also said while it would allow the development of the identified magnetite resource in the Karara/Mungada Blue Hills area, it was not predisposed to the extraction of hematite deposits in the area.
This has implications for Gindalbie's $94 million Mungada hematite project and the next phase of Midwest's Koolanooka/Blue Hills project.
Midwest CEO Bryan Oliver said that as this project involved mining previously mined pits and the Government indicated that it would consider projects on a case by case, Midwest is hopeful that it will be able to proceed � but added there would be no critical impact for the company if it did not go ahead.
�That program is fairly small-scale and really doesn't impact on our long-term value,� Oliver said.
Consolidation in the market
One of the major features of the iron ore industry this year has been a flurry of merger and takeover activity, resulting in some consolidation of players.
Mt Gibson Iron kicked off the year with a successful takeover of Aztec Resources.
Mt Gibson managing director Luke Tonkin said Aztec was an ideal acquisition because of the value it provided to shareholders with little additional risk.
�It was the only company that we saw in a whole range that we analysed that was trading at a discount to what we considered at the time to be its net present value (NPV). The other thing is that it was very close to being in production, which we thought basically mitigated the risk�because we could move it into production pretty quickly just by completing the project.�
In fact, Tonkin said, the Koolan Island project was brought online quicker than expected, the production is higher than anticipated, and the quality of the material being mined there is also better than expected, with more than one million tonnes being shipped since late June.
�So Aztec has added production, it's allowed us to grow our customer base, and it has allowed us to add further exposure to what is a very strong iron ore price outlook,� Tonkin said.
The company is still on the lookout for other opportunities, although Tonkin said the market is now very tight.
�We're very mindful that we won't move into opportunities that we will need to overpay for,� adding that while he wouldn't rule out doing another aggressive takeover, Mt Gibson �would prefer to merge with like-minded companies that want to grow their base�.
In August Mt Gibson's approach was endorsed by Macquarie Research, which said the company has �first mover advantage� and is best placed to take advantage of strong iron ore prices in the medium term.
In other moves towards consolidation, Gindalbie Metals and Sundance Resources proposed a merger in late September, although by late October this was off the table again, following due diligence and feedback from shareholders in both companies.
Early in October, Territory Resources chairman Michael Kiernan reportedly flagged a possible merger with mineral sands producer Matilda Minerals when the company announced it had lifted its stake in Matilda to 8.6 per cent, at the time saying it would provide economies of scale in administration, exploration expertise and community relations.
Fairstar Resources launched a hostile takeover bid for Mid West iron ore explorer Golden West Resources in late October.
Another big move has been the takeover bid for Midwest Resources by Murchison Metals. This is widely thought to be driven largely by a bid for control of the Oakajee Port and Rail infrastructure development � critical to both Midwest's Weld Range project and Murchison's Jack Hills project.
At the time of writing, Midwest had received the bidder's statement from Murchison, with the Board preparing a target statement and recommendation for shareholders.
On the subject of the bid, Midwest's Oliver said, �At this point in time our recommendation to shareholders is to do nothing until the Board has had an opportunity to fully evaluate the bid, but our initial observations and concerns about the unsolicited bid go to the relative value they have offered, particularly if you look at it from the point of view of current identified resources.
�We've got twice the hematite resources that Murchison Metals have, they are at a higher level of confidence in terms of JORC compliance, and in terms of the beneficiable ore we have ten times the identified resource positions, and yet the bid is valuing us at half Murchison's value, so we would argue there seems to be a major mismatch there.�
While Oliver concedes that there may be �some legs� in the argument that there are regional and infrastructure synergies between the operations, he feels that this has not been quantified sufficiently for shareholders, and also has concerns about the lack of clarity about the arrangements between Murchison, Mitsubishi and Crosslands.
These recent moves towards consolidation in the market are being driven by a number of factors, according to Ord Minnett senior research analyst Peter Arden � including strong economics, underpinned by a good profit margin and ready market for hematite; the need to gain access to infrastructure; and whether companies currently have magnetite or hematite resources or reserves.
Another feature that has been seen in the oil and gas market, and which may also come into play with iron ore, Arden said, is companies being acquired to get competent people with experience in the iron ore market.
�The whole business of iron ore is built on longstanding relationships. At the moment, some of those probably don't count so much, but they will. So that's why there is this consolidation in some ways � getting bigger size, getting the right relationships, getting the people who have drunk rice wine with the Japanese and Chinese ore buyers and will be there when times get a bit tougher,� Arden said.
He believes that companies with a couple of key characteristics will be the most likely merger or takeover targets: access to infrastructure, and the ability to deliver significant amounts of hematite in the short term at least, and hopefully for longer.
This is because, while the demand for steel is being driven by a fundamental, long-running industrialisation phase in both India and China, players must strike now while the iron is hot � so to speak.
�If you can get your hands on some of this reasonable hematite, and ship it out and make money today, that can help you fund a bigger long-term project and put you in the big league,� Arden said.
�We're seeing leapfrogging in the market by absolute minnows, and this is where the market needs to be a bit careful because some of these minnows won't pull it off. But they have been able to wave results that look like they might be interesting and give them the chance to get towards the front of the queue and into production.�
Challenges to industry
As well as consolidation, there are other major issues affecting the shape and nature of the industry. Especially in the Mid West region, infrastructure is a critical issue, with a bid to build the Oakajee Port and Rail Development underway. Midwest Corporation, together with Chinese partner Yilgarn Infrastructure, is facing off against Murchison, which is in partnership with the Japanese giant Mitsubishi, South Korean iron and steel producer Posco and Toll Holdings.
The stakes are high, as the infrastructure is vitally important for Murchison's Jack Hills project and Midwest's Weld Range project, a joint venture with Chinese steelmaker Sinosteel. Oliver said the project is currently in the pre-feasibility stage, which will be completed in mid 2008, with a view to being in a position to commit in early 2009 and have the infrastructure and mine ready for production in 2011.
Murchison's Jack Hills Stage 2 is at feasibility stage, with construction expected to begin during 2008 with the mine also ready for production in 2011. The development would increase Murchison's production capacity to 25 mtpa.
Infrastructure development has been a key component of a number of other large projects which will add significantly to output as they come online.
Fortescue Metals Group is progressing its 45 mtpa Pilbara Iron Ore project at a total capital cost of $2.78 billion. The project is due for completion in early 2008 and includes the construction of a dedicated rail line and port, while Rio Tinto has approved the expansion of the Cape Lambert port near Dampier, which will cost $1.12 billion and provide an additional 25 million tonnes of iron ore export capacity.
The Western Australian Government has also been doing its bit for the Mid West iron ore province, with the arrival of a new high-capacity iron ore ship loader at Geraldton Port as part of its Berth 5 Iron Ore Expansion Project. The new loader will increase the amount of ore the port can process from 3.5 mtpa to 12 mtpa.
A new $225 million multi-user public berth at Port Hedland has also been approved by the Western Australian Government and is expected to be operational by 2009. It will have capacity of around 18Mt and will accommodate small Cape class vessels.
Atlas Iron will be one of a number of resources companies operating in the Pilbara to contribute towards the new berth, which will source around $105 million of funding from foundation companies. Others could include BHPB, Consolidated Minerals and Aurox Resources.
With iron ore mines costing anywhere from half a billion dollars upwards, and infrastructure projects in the region of $3 billion, there is big money at stake. And just how the industry will be funded � that is, who is going to stump up the cash for further development � is a bit of an unknown.
�The US credit market crunch has changed things a bit � there used to be cheap money around and we weren't so worried. Now I suspect people are getting a little bit anxious�� Arden said.
Many of the large Chinese steelmakers and infrastructure suppliers are buying into Australian iron ore projects through joint ventures, and this is a trend that is set to continue, according to Arden.
�The really big producers, BHPB and Rio Tinto especially, are having difficulty meeting demand. So there are going to be these new links forged by incredibly hungry steel mills.�
In September, Gindalbie Metals announced a join venture with Chinese steel and iron ore company Ansteel to proceed with development of the Karara magnetite project and Mungada hematite project. The projects involve a total combined investment of up to $1.8 billion in new mining and processing facilities and associated infrastructure in WA and China. The plan is for Mungada to begin exporting in the first quarter of 2009 and Karara to deliver the first ore around the same time.
And Midwest's partnership with Sinosteel is another example of how juniors can get a leg up with both financing and relationships.
�We're all junior companies, our balance sheets are fairly limited, so in terms of raising finance their support is critical. In our case in particular, our partner is a conduit for sales into China� when we come to a bankable feasible study conclusion and doing the financing, having that ability to secure the offtake over a long period of time into the market where the ore is going to be sold is crucial,� Oliver said.
The only way is up�for prices
Although it is a secretive affair, the preliminary negotiations to set next year's benchmark prices for iron ore have begun. With the big producers leading the talks for Australia and China negotiating on behalf of Asia, a firm decision on prices is expected in the New Year, with the new prices taking effect from April 1st 2008.
The contract price for iron ore for the 2007/08 Japanese financial year was 81.73 US cents per dry long ton unit for fines, and 104.3 US cents per dry long ton unit for lump, which was an increase of 9.5 per cent over the 2006/07 price.
This year, however, the forecasts are for a double digit price increase at the very least, with some predicting increases of up to 35 or even 50 per cent � because of a number of factors coming into play.
�You're seeing spot prices globally well above benchmark prices which indicates that there is more demand than there is supply. We're seeing infrastructure bottlenecks that are delaying shipments, we're seeing production coming on slower than was anticipated and we're seeing that the cost of that extra production coming on at a much higher price,� Tonkin said.
Both BHPB and Rio Tinto have flagged that they would like a freight differential for Australian iron ore to be included in the negotiations, given the clear difference in the price paid for Australian ore versus Brazilian and Indian ore. Because of the level of demand, Australia is in a position of relative strength, so it may be a good time to push the issue.
�But the Australians could cop a bit of a backlash if they try to force it too strongly, so it's very sensitive,� Arden said.
On October 31 st, BHP Billition took this a step further, by calling for the commodity to be traded in a more transparent market like that of thermal coal. It suggested that its new strategy was to move its expiring contracts onto an �iron ore index�, with forward deliveries and financial swaps that better reflected the spot market.
BHP Billiton also reportedly threatened to sell some of its expanded iron ore production on the spot market in the absence of a freight premium.
The spot iron price in China is higher than $US150 a tonne - about twice the price of Australian iron ore including shipping to China.
Freya Purnell is a Sydney-based freelance journalist and editor. She has been writing primarily about business and finance for seven years, and her work has been published in a range of publications including Money Management, Financial Planning, Traveltrade, B&T Weekly, and Campus Review. Contact Freya at [email protected]
Magnetite's day will come say would-be producers
Magnetite has been the poor cousin to hematite, suffering from an industry perception of inferiority, but with hematite lump becoming scarcer it could provide a solution for the world's steel producers.
When it's produced, magnetite is very fine, and so must be made into pellets before it can be used by steelmakers. Pellet plants are expensive � costing well above a billion dollars to build � and the process is energy intensive. On the upside, magnetite typically has a higher iron content of about 68-69 per cent, compared with hematite of up to 60 per cent.
�There is currently a small premium for magnetite pellets, but they have tended not to catch price lifts as good as they should have in my opinion, to reflect that extra energy component,� Arden said. �As a higher grade and stronger form of iron ore than fines and even some lump, pellets have to attract a premium eventually.�
�The other reason to have a significant premium in the pellet price is to entice the investment of very large sums of capital into the projects and facilities for pellet production, something that so far investors have been reluctant to commit to.�
The pellet market is currently dominated by Brazil, but some Australian producers are tackling the negative sentiment regarding magnetite and launching projects in this area.
At an iron ore conference in Sydney recently, mining manager of Australasian Resources, Andrew Caruso, told delegates that their magnetite pellet product could attract an additional US$20-38/tonne selling price over comparable hematite product. And with additional concentrating and pelletising costs of around US$15-25/tonne this represents a healthy margin.
Where Australia may miss an opportunity with magnetite, according to Arden, is if it is simply used as a quarry for magnetite to then be shipped and processed offshore.
�The ability to capture more value and lock in some energy in this magnetite pellet area means that there really is, for the people who can get it right, a big prize.�
Australasian plans to fabricate infrastructure modules in China and have them shipped into the Pilbara � more than US$150 million in mining equipment being delivered in the next six months.
Some of the leading magnetite projects currently on the table, according to ABARE, include Australasian Resources Balmoral South project, Mineralogy's Cape Preston stage 1 and stage 2 mine and pellet plant, Atlas Iron's Pardoo project and Gindalbie's Karara mine.
In August, Fortescue Metals also finalised a joint venture with China's largest steel mill, Baosteel, to explore and potentially develop a targeted one billion tonne prospective magnetite deposit in the Pilbara.
It was also announced in September that top 10 Chinese steel mill, Baotou Iron and Steel had signed an agreement to inject up to A$40 million to take a South Australian magnetite project owned by Centrex Metals Limited through to completion of a bankable feasibility study.
The agreement will entitle Baotou to 50% of Bungalow's expected total annual production of 3 million tonnes of magnetite concentrate.
Australasian has partnered with Chinese steel producer Shougang to hopefully move its Balmoral South project from feasibility into production by 2010. Owned by Mineralogy, the deposit is estimated as a 40 mtpa resource with a 25 year mine life.
China's CITIC Pacific is proceeding with development of two one-billion-tonne magnetite projects at the adjacent deposit, so the mines will be able to share infrastructure.
According to Caruso, China is seeking a way to enter and take control of the iron ore market, and with falling grades of hematite from Australia and Brazil, the Chinese have no problem signing long-term agreements for magnetite. �They know it, they like it and they want more,� said Caruso.
If Shougang agrees to proceed by June 2008, they will loan 100 per cent of project costs, will execute construction and offtake 100 per cent of the product.
Even though magnetite seems to be less attractive in the current market, the prices could prove attractive if Australasian can obtain the predicted premium on pellets.
GBG Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
