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Asia’s insatiable appetite for iron ore paints a bright outlook for Australian companies.

The Australian Bureau of Agricultural and Resource Economics and Sciences is forecasting Australia’s iron ore exports to increase from 403 million tonnes in 2010 to 425 million tonnes this year and 462 million tonnes next year. ABARES is forecasting increasing exports to 599 million tonnes in 2016. In its March quarterly report, ABARES says China’s iron ore imports are forecast to grow by 2 per cent to 634 million tonnes in 2011, with Australian and Brazilian producers expected to be the major suppliers.

Increasing demand is pushing up prices, with iron ore expected to increase from an average $US112 a tonne in 2010 to $US149 a tonne this year.

Richard Batt, of Shadforth Financial Group, has established a list of iron ore companies he believes potentially offer the best value in response to the industry outlook. Risk levels in Batt’s stock list vary, as as all investors are aware risk should always be carefully considered before investing.

Atlas Iron (AGO)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

Based in the Pilbara region of Western Australia, Batt says Atlas Iron has several key projects strategically located within 150 kilometres of Port Hedland. He says the company shipped 1.63 million tonnes or iron ore for the six months to December 31, 2010, and is targeting production of 12 million tonnes within the next two years. The company recently reported a maiden net profit of $30.1 million for the six months to December 31, 2010. Batt expects the company’s financial performance in the 2011 second half to be significantly stronger in response to increasing sales volumes, higher iron ore prices and reducing operating costs. Atlas Iron’s acquisition of Giralia Resources NL is a sound fit as both companies shave complementary assets to significantly increase resource inventories and earnings.

Gindalbie Metals (GBG)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

Batt says emerging iron ore producer Gindalbie Metals is stgeloping the Karara Iron Ore Project, with the potential to produce 30 million tonnes of iron ore a year for more than 35 years. In February 2011, the company announced that its maiden iron ore shipment will proceed within the next two months. Batt says this is ahead of schedule, and follows the signing of a hematite ore sales agreement with Sinosteel Midwest Corporation. “Signing this agreement is a significant event, as it enables the Karara project to generate initial cash flow, taking advantage of high iron ore prices and strong demand for quality product,” Batt says.

Fortescue Metals Group (FMG)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

Fortescue Metals Group has rapidly become a major Australian iron ore miner, producing 22.1 million tonnes during the six months to December 31, 2010. The company also reported a significant increase in first-half underlying EBITDA (earnings before interest, tax, depreciation and amortisation) to US$1.3 billion.  Strong market conditions lifted underlying revenues and earnings in line with increasing shipping volumes. Batt says Fortescue’s average selling price increased by 105 per cent to US$138.50 a tonne. The company also declared a maiden interim dividend of three Australian cents a share. “The company’s goal is to become one the Pilbara’s lowest cost producers,” Batt says. “It has extensive exploration acreage and recently announced a new discovery at its Brockman iron formation. In close proximity to its Chichester Hub mining operations, it will enable Fortescue to maximise value from this new discovery in conjunction with existing mines and infrastructure.”

Rio Tinto (RIO)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

Increasing steel consumption is driving up the iron ore price. ABARES says China is the world’s biggest consumer of steel, accounting for an estimated 46 per cent in 2010. ABARES indicates that world steel consumption may increase 6 per cent in 2011 to 1.4 billion tonnes and possibly reach 1.9 billion tonnes by 2016. It estimates that in 2011, China, India and Brazil will account for 53 per cent (748 million tonnes) of global steel consumption. It says higher consumption in these countries largely reflects higher rates of urbanisation and increasing incomes. Batt says Australia’s export earnings from iron ore are forecast to increase 64 per cent to about $57 billion this financial year and may rise to $68 billion by June 30, 2016.

Rio Tinto is the world’s second biggest iron ore supplier, and Batt says the mineral contributed about 70 per cent to underlying earnings of $US13.987 billion for the 12 months to December 31, 2010. He says underlying earnings from its iron ore group was up 147 per cent on 2009. Batt says Rio Tinto’s iron ore volumes from the Pilbara set new records, increasing by 9 per cent to 223 million tonnes. “Rio has a high quality suite of long-life assets in low risk countries with relatively low operating costs,” Batt says. “The company has a stronger balance sheet and the Pilbara iron ore asset expansion will go a long way to increasing earnings going forward.”

BC Iron (BCI)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

BC Iron’s first shipment from its joint Nullagine project with Fortescue Metals left Port Hedland for China in February 2011. Batt says the BC Iron board is recommending its shareholders – in the absence of a better offer – accept a takeover offer of $3.30 a share from Regent Pacific Group, which owns 19.9 per cent of BC Iron stock. But Batt believes a higher bid may emerge as BC Iron has been in discussions with another major shareholder Consolidated Minerals. While discussions between BC Iron and Consolidated Minerals have been described as constructive, no further details  were available at March 8, 2011. Batt says BC Iron shareholders will vote on the board’s proposals in April. BC Iron closed at $3.05 on March 8, 2011. Batt says any higher bid will lift BC Iron’s share price, but there’s also a chance it won’t happen.

Sundance Resources (SDL)

Chart: Share price over the year to 11/03/2011 versus ASX200 (XJO)

For those wanting to heighten their risk/reward profile, Batt suggests investors consider Sundance Resources. An Australian exploration company, it’s focusing on interests in the Republic of Cameroon and the Republic of Congo in central west Africa. The company’s involved in the Mbalam Iron Ore Project, and a definitive feasibility study is due to be finished by the end of March 2011. Batt says the company hopes to confirm sufficient hematite mineralisation to support a production target of 35 million tonnes a year for the first 10 years. Production is scheduled to begin in 2014. Batt says Sundance has advised that discussions with potential strategic partners and financiers concerning the Mbalam Project are proceeding well. “If Sundance secures a deal, it will go a long way to underpinning the company’s future growth,” he says.

 

COMPANY CODE SHARE PRICE CLOSE
Atlas Iron (AGO) $3.60
Gindalbie Metals (GBG) $1.08
Fortescue Metals Group (FMG) $6.40
Rio Tinto (RIO) $83.91
BC Iron (BCI) $3.05
Sundance Resources (SDL) 50 cents

Price current to market close, March 8, 2011

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