The adage that time heals all wounds often applies to stocks left for dead in the wake of some calamitous economic event. Such appears to be the case with the much-heralded death of the iron ore mining boom here in Australia.
Risk tolerant investors aware the world has yet to produce an alternative to steel saw opportunity in the falling fortunes of major ASX iron ore producers. Chinese demand that fueled the boom, they reasoned, was unlikely to dry up.
Our second largest producer of iron ore, Rio Tinto Limited (RIO) hit an all-time high of $118 dollars per share prior to the GFC and recovered to $89 dollars preceding the demise of the mining boom. By June of this year Rio was trading at $86 dollars, falling to the current price of $70 in the wake of weakening in the price of iron ore in the last few months.
Contrasting the share price performance of Rio against the third largest iron ore producer, pure play Fortescue Metals (FMG) points to a new opportunity for risk takers. Both stocks saw strong performance as the price of iron ore improved in 2016 but parted company in the second quarter of 2017. In fairness to FMG, Rio is diversified although revenues from iron ore are not quite double the total amount of the company’s other operations.
The opportunity here is increasing demand for higher grade iron ore. Higher grade ore (62%) has always attracted a higher price, a trend accelerated by growing environmental concerns. Analysts tell us Fortescue suffers from its lower grade ore, in contrast to the higher grades from Rio.
Regardless of whether one denies or believes in climate change or its causes, it is hard to dispute the fact major urban centres in China are choking in their own polluted air.
Despite its position as the world’s leading polluter, the Chinese government is taking aggressive action, including efforts to reduce pollution from belching steel mills. The Chinese government is forcing the closure of older, dirtier mills and requiring remaining mills to use higher grade iron ore that is less polluting. The steps are at the forefront of a crackdown by Beijing, which this month flagged a widening of anti-smog targets to 82 cities from 28.
Investors in the resources sector who take the time to research before they buy learn that not all resources are created equal. There are differences in lithium, for example, and in iron ore.
Historically the preferred source of iron ore has been hematite, often referred to as direct shipping ore (DSO) since the extracted ore needs no processing beyond crushing and screening. However, the amount of iron content – the grade – varies from 58% to a high of 62%.
There is a second source – magnetite – with higher iron ore content in raw form but requires additional processing to produce iron ore concentrate pellets, with grades between 65% and 70%. While DSO must undergo a highly pollutive process known as splintering before the ore can be fed into a steel-producing furnace, magnetite pellets are simply shoveled into the furnace without any further processing.
Magnetite has two major advantages over hematite, the first being less grade variant with 68% a consistent average, and of greater significance, it is far less polluting. An analysis by the energy research firm Crucible Group showed a 108 kilogram per tonne reduction in greenhouse gas emissions from magnetite over hematite.
From UK based business intelligence firm CRU Group, we can see the demand growth for magnetite pellets.
There are four junior miners on the ASX to consider, with three in the exploration and development stages and one already in production. Beleaguered Fortescue Metals is also seeking a presence in magnetite production with its pilot plant in Western Australia as part of its Iron Bridge Joint Venture, owned by Fortescue Metals Group, Baosteel Group and Formosa Group. Rio Tinto reportedly also is producing magnetite but not in Australia. Takeover target Atlas Iron (AGO) also has a magnetite exploration project.
Three of the four juniors are high risk and speculative at best, with one qualifying for punters only status. However, all could emerge as pure play magnetite producers.
Grange Resources (GRR) already produces two million tonnes of magnetite iron ore pellets per annum, with plans for an increase to 2.7 million tonnes. The company maintains its own pellet processing plant and port facility, supplied by the Savage River magnetite iron ore mine in Tasmania. A bullish analyst back in 2010 noted the company’s challenge at that time was its “marginal profitability” due to the low price for iron ore pellets. Grange is well-positioned to profit from increased demand with its expansion project magnetite project at Southdown near Albany in Western Australia. A feasibility study indicates Southdown is projected to produce ten million tonnes of pellets annually, four times the output at Savage River.
Grange is a 70% owner of the Southdown Project, a joint venture with SRT Australia Pty Ltd, owned by a Japanese steel manufacturer and a Japanese trading house. The company has an established record of revenue and profit generation, with average earnings growth of 3.5% over five years and 26.8% over ten years. Grange pays a fully franked dividend, with a current yield of 4.4% with average annual rates of total shareholder return (dividends plus share price appreciation) of 38.4% over five years and 10.4% over ten years. Its trailing P/E (price to earnings ratio) of 2.30 is well below the sector average of 12.56.
All the remaining stocks are still in exploration and development stages, with only Gindalbie Metals (GBG) and Carpentaria Resources (CAP) showing year over year share price appreciation. Gindalbie had been more diversified in the past, with development opportunities in gold as well as current projects in copper/cobalt and iron ore. Its current focus is more on Copper/Cobalt than on magnetite iron ore.
The company has an existing agreement with Terrace Mining Pty Ltd to acquire up to a 75% interest in the Mt Gunson Copper/Cobalt Project in South Australia. Gindalbie has a 47.4% joint venture interest with Ansteel of China in the Karara Iron Ore Project. Karara is operated by Ansteel, producing magnetite concentrate for export to markets throughout Asia. Gindalbie plans to continue feasibility studies at Mt Gunson while exploring further acquisitions in gold and other base metals. Gindalbie also has a tenement package in the Lodestone Magnetite Project, near Karara.
Although Karara has been producing magnetite concentrate since 2013, with processing costs so high and price so low, as of 12 July of 2017 the joint venture directors filed with the Australian Securities and Investments Commission (ASIC), Karara Mining Limited’s (KML) directors a statement the company would not be able to fund the projected losses for 2017 and 2018, nor deliver the more than $1.2 billion due for repayment this year. The statement went on to say Ansteel had committed to arrange funding to meet Karara’s expected funding shortfalls.
At best Gindalbie may be a long-term play on the Copper/Cobalt potential at Mt Gunson for the hardiest of punters, willing also to watch and wait for any signs of life at Karara. Gindalbie has no operational control over Karara, but Ansteel is the seventh largest steel producer in the world. The Gindalbie share price over ten years reflects the company’s challenges.
Investors flocked to Iron Road (IRD) in early 2017 upon the news the company had signed a Memorandum of Understanding for support of its flagship Central Eyre Iron Project (CEIP) in South Australia. The memorandum spelled out an infrastructure funding agreement with five major Chinese Steel Mills. A DFS (Definitive Feasibility Study) at CEIP confirmed the potential to produce more than 20 million tonnes per year of high grade iron ore concentrates over a mine life of 30 years. Reserves were estimated at 3.7 billion tonnes.
The share price gradually fell back to earth in the face of repeated delays in developing the rail and port infrastructure needed to support the project.
The company is now planning an entitlement offer as part of an alternative funding strategy, stating “certain aspects of the work with construction partner China Railway Group have been drawn-out and progress overall has been unacceptably slow.” The offer will be coupled with efforts to secure additional partners and investors. China Railway Group is reportedly the largest infrastructure contractor in the world and a major consumer of steel.
The offer is expected to net $1 million. Given that CEIP has the potential to become Australia’s largest magnetite mine and the anticipated demand increase for magnetite concentrate, investing in IRD may be more than a punt.
Carpentaria Resources (CAP) has completed a promising PFS (pre-feasibility study) for its flagship Hawsons magnetite iron ore project in New South Wales. The study along with independent expert analysis claims the project has maiden reserves of 755 million tonnes and “supergrade” content of 70%.
For investors casting a wary eye based on Iron Road’s infrastructure costs CAP is an attractive alternative as Hawsons has access to existing rail, port, road, and power and water infrastructure. The company’s initial production is expected to produce 10 million tonnes per year. Carpentaria has a banking facility study (BFS) to attract funding for the project, with a completion date of mid-2019.