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A few months ago the price of our largest export, iron ore, tanked. Many claimed iron ore prices would continue to fall as long as the Chinese Dragon continued to slow. Others predicted a rebound in the price by year end.

The Bureau of Resources and Energy Economics (BREE) just updated its 2013 iron ore price estimate from $101 a metric tonne to $106 a metric tonne, based on anticipated infrastructure and stimulus spending in China.  Chinese retail sales and industrial output are exceeding expectations and the price of iron ore has climbed to around $126 a metric tonne.

Shares of our largest iron ore producers have responded positively to rising iron ore prices. Here is a three-month price chart of BHP Billiton (BHP) and Rio Tinto (RIO) moving in sync with a rising iron ore price:

Drastic declines in commodity prices do not impact all producers equally. Obviously, junior miners suffer more as investors dump the shares fearing the worst. But if a lasting rebound in iron ore prices is on the cards, some small cap miners could rebound strongly.

The following table lists some prospective candidates. All have at least one metric that suggests the possibility of a brighter future. Some have outstanding 2 Year Earnings Forecasts; others have low Forward Price to Earnings or Price to Book Ratios; and some have relatively strong balance sheets. 

Company

Code

Market Cap

Forward P/E (2014)

P/B

2 Year Earnings Growth Forecast

Share Price

Year over Year Share Price % Change

Gindalbie Metals

GBG

$337m

8.0

0.42

70.3%

$0.24

-50%

BC Iron

BCI

$335m

6.59

2.55

$3.23

+33%

Western Desert Resources

WDR

$235.26

6.17

3.51

206.7%

$0.74

+62%

Jupiter Mines

JMS

$228.18

0.44

127%

$0.10

-68%

Iron Ore Holdings

IOH

$125

13

1.19

12.7%

$0.78

-40%

Centaurus Metals

CTM

$51.87

13.25

1.31

51.1%

$0.27

-50%

Crusader Resources

CAS

$50.66

4.44

1.92

64.3%

$0.40

-55%

Gindalbie Metals (GBG) suffered a 50% drop in price year over year, yet the Forward P/E and 2 Year Earnings Growth Forecast suggest better days ahead. What’s more, the shares are currently trading below the book value per share of $0.58. 

Small cap resource companies require solid balance sheets to survive in learner times. All companies need to balance cost of exploration against actual revenue generation – and many are at risk of running out of money  even before the most attractive asset goes online. Debt financing and capital raisings are also more difficult to pull off when the sector is no longer in the midst of a raging bull run. 

The following table looks at several important balance sheet items for the seven small cap stocks:

Company

Code

Gearing

Total Debt

Total Cash

Current Ratio

Gindalbie Metals

GBG

0

0

$40.52m

14.38

BC Iron

BCI

12.7%

$16.7

$92.8

2.04

Western Desert Resources

WDR

.07%

$36.55k

$10.2m

3.03

Jupiter Mines

JMS

4.7%

$19.26m

$65m

13.51

Iron Ore Holdings

IOH

0

0

$109..69m

10.08

Centaurus Metals

CTM

0

0

$8.85m

2.35

Crusader Resources

CAS

0.59%

$134.26k

$5.33m

2.27

 

With no debt and solid liquidity, as evidenced by a healthy current ratio of 14.38, Gindalbe is a good bet on paper. However, there’s more to the story – just look at its one-year price chart:

Gindalbie’s major iron ore project at Karara, Western Australia, is still in development stage. The project is a joint venture with Chinese steel producer Ansteel, and involves both hematite and magnetite iron ore. Shipment of hematite has begun but there are delays and cost concerns regarding project completion and commencement of magnetite shipping.  

In late November Gindalbie announced an equity raising of $40 million to institutional and sophisticated investors. An additional $22 million was placed with Ansteel to maintain its current ownership interest of 36%.  

If you regard insider buying as a positive sign for a company’s outlook – on 11 December Gindalbie Chairman George Jones snapped up 500,000 shares of GBG at market prices.

Be warned, however, that analysts at UBS, Credit Suisse and JP Morgan are anticipating more capital raisings should cost overruns and delays continue to impede the progress of Karara.

BC Iron (BCI) is up 33% year over year. The company first listed on the ASX in 2005 – shipping its first iron ore production in 2011. BCI has operating mines in the Pilbara region of Western Australia, with its principal asset operating in a joint venture with Fortescue Metals (FMG). BCI uses Fortescue’s rail and port infrastructure to lower costs; a first year operating margin of 33% (in 2012), and net profit of $50.6 million, is impressive. 

BC Iron announced a capital raising to increase its holding in the FMG joint venture to 75%. Analysts at UBS, Macquarie and BA-Merrill Lynch praised the deal and its share price spiked.  Here is its chart:

Western Desert Resources (WDR) is still in development stage; its first shipment of iron ore from Roper Bar in the Northern Territory is scheduled for 2013.  The company has a diversified resource base with exploration assets in gold, uranium, geothermal energy, copper, nickel, uranium and rare earths. 

Over the year the company generated around $100 million in revenue from multiple capital raisings and was the target of a takeover bid from Meijin Energy Group of China; an offer that was later withdrawn for unspecified reasons.  

The company released several encouraging updates in December regarding the quality of the iron ore at Roper.  According to Thompson/Reuters there’s only one analyst covering the company with a STRONG BUY.  Considering the breadth and depth of its asset base, this is a company to watch.

Jupiter Mines (JMS) has suffered share price declines all year. 

Here is its five-year price chart:

Perth-based Jupiter Mines has two major exploration projects in the Yilgarn region of Western Australia; one at Mount Ida and the other at Mount Mason. In early November, Jupiter announced plans to freeze additional expenditures to develop the Mount Ida project until market conditions improve.

Jupiter also owns a 49.9% interest in the Kalahari Manganese Fields in the Northern Cape of South Africa. 

The company began shipping manganese from its jointly owned Tshipi mine in the Kalahari region in November.  Look out for a possible restart at Mount Ida and production volumes for the Tshipi mine. Also expect possible capital raisings to improve the company’s balance sheet.

Iron Ore Holdings (IOH) is another junior iron ore play that’s suffered from the mining slowdown. The company has three development areas – Central Pilbara, Coastal Pilbara and Western Pilbara – with six total projects underway. The most promising are Bungaroo South, Iron Valley and Maitland River.  All are in close proximity to existing rail and road infrastructure.

The company actually reported a profit for FY 2012 from asset sales, leaving IOH with a very strong balance sheet.

Australia based Centaurus Metals (CTM) has iron ore assets in Brazil. Centaurus Metal’s principal holding is the Jambreiro Iron Ore Project in south-east Brazil where drilling has begun. Thompson/First Call shows four analysts covering CTM – all with STRONG BUYS and a consensus price target of $1.00. Its share price has fallen in step with iron ore prices.

Production for the domestic market is expected to commence in late 2013. Although Brazil is hosting the 2014 World Cup and the 2016 Olympics, the Brazilian economy is slowing. Third quarter GDP fell to a meager 0.6%, well below economist estimate of 1.2%.

Crusader Resources (CAS) is another Australian-based miner operating in Brazil. The company recently won an operating license from the Brazilian government for its Posse iron ore project. Production is expected to begin in early 2013. Crusader has 100% interest in this project. 

The company also operates a gold mining and tungsten mining project in progress. 

One analyst covers the company with a STRONG BUY and a price target of $1.20. The Forward P/E of 4.44 and 64.3% projected earnings growth over 2 years hinge on meeting production targets at Posse.

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