IN the wake of the collapse of junior iron-ore producer Western Desert Resources, slide-rule wielding resource analysts are slashing their valuations of the miners, as well as price assumptions for the ferrous material.
With the benchmark iron price at just under $US84 a tonne – 40 per cent down on the year – at least three miners look out of the money, based on UBS’s revised break-even cash costs.
These sums include adjustments for freight, moisture content and quality and assume the Aussie dollar holds around US93c.
The good news is that Rio Tinto (RIO, $61.48) and BHP Billiton (BHP, $35.73) remain well in the clear with all-in cash costs of $US45/t and $US50/t respectively, while Fortescue Metals (FMG, $3.92has some wriggle room on $US74/t.
Mt Gibson (MGX, 74c) and BC Iron (BCI, $2.13) are just above water at $US78/t and $US81/t, while Atlas Iron (AGO, 57.2c) is thereabouts on $US85/t.
Things look very squeezy for Grange Resources (GRR, 14.5c) on $US88/t and Gindalbie Metals (GBG, 4.5c) on $US100/t.
There’s also steel producer Arrium (ARI, 73.5c), which produces export haematite and has expanded into mining consumable (grinding media).
In relation to Arrium’s Southern Iron operation, Credit Suisse estimates an all-in cost of $US89/t, which implies Arrium is “paying for the privilege” of mining the short-life Peculiar Knob operation.
Last year Southern Iron contributed 3.8 million tonnes to Arrium’s output of 13mt. In toto, Arrium’s across the board production cost of $73t implies some headroom.
Credit Suisse notes the care and maintenance costs and contractual commitments mean that closing the mine is not an option.
But the balance of production can be tweaked.
According to Arrium, the company has the flexibility to focus on low-cost ore from its Middleback Ranges venture.
The better news is that Newmont will restart production at its Indonesian Batu Hijau copper mine, which is a big customer for Arrium’s grinding media.
Meanwhile, Patersons warns the usual September quarter uptick for the iron-ore price has not materialised, “despite demand for iron ore remaining robust’’.
As a result, iron ore is unlikely to recover to the magic $US100/t level in a hurry.
The firm has slashed its valuation of Fortescue shares from $4.69 to $4.21, Atlas from 71c to 58c and Mt Gibson from 83c to 74c.
Criterion’s visceral instinct is to avoid the small fry until signs of an expected cut-back in marginal global output actually materialises
Having said that, no-one rings the bell at the turning point and some of them are highly leveraged to a price recovery.
Calling in the receivers on Friday, Western Desert cited the iron ore price at five-year lows, coupled with the resilient $A.
But given Western Desert’s teething troubles with its NT mine which required barging of the material, there were company-specific factors as well.
Source: The Australian
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