Iron shinier than gold in stock mar­ket

There are many side play­ers in iron ore, but few which can get mov­ing quickly, writes James Dunn

The Weekend Australian - Review - - Steel -

I RON is not gold: that they are both met­als is about all they have in com­mon. But on the stock mar­ket, gold takes a back seat to iron as the metal to own. There is no bet­ter il­lus­tra­tion of this than the spec­tac­u­lar growth of Fortes­cue Met­als Group, which last month made the first shipment of iron ore from its Cloud­break mine in the Pil­bara re­gion of West­ern Aus­tralia.

Since the be­gin­ning of 2006, Fortes­cue’s stock has risen from around $ 5 a share to the equiv­a­lent of $ 100 ( fol­low­ing a ten- for- one share split in De­cem­ber last year, Fortes­cue trades at $ 10). That val­ues the com­pany at $ 28 bil­lion.

Along the way, Fortes­cue has faced a moun­tain of crit­i­cism: its ore wasn’t high­grade enough, it didn’t have the in­fra­struc­ture, it didn’t have the cus­tomers, its project used risky fi­nanc­ing. Many Aus­tralian fund man­agers have cho­sen not to be­lieve the Fortes­cue story. But in mak­ing the shipment, Fortes­cue has sig­nalled that its am­bi­tious plan to pro­duce and ex­port 100 mil­lion tonnes of iron ore a year within a few years is more than pos­si­ble.

It’s real, it’s hap­pen­ing and Fortes­cue is now too big for a fund man­ager not to own,’’ says the head of house trad­ing at an Aus­tralian in­vest­ment bank. If you didn’t own it, you’ve un­der- es­ti­mated the Chi­nese steel mills’ de­sire to have a new, ma­jor sup­plier to lessen the dom­i­nance of the big three ( BHP Bil­li­ton, Rio Tinto and Vale of Brazil). It’s the best- per­form­ing stock in the re­sources sec­tor: you ei­ther own it, or you un­der- per­form those that do.’’

But JPMor­gan an­a­lyst David Ge­orge says Fortes­cue is get­ting ahead of it­self,’’ with about 200 mil­lion tonnes of iron ore pro­duc­tion a year needed to jus­tify the cur­rent price. We can’t jus­tify that share price with con­ven­tional val­u­a­tion work,’’ says Ge­orge. JP Morgan has an un­der­weight’ rat­ing on Fortes­cue, with a tar­get price of $ 4.60.

Nev­er­the­less, in­sti­tu­tional and re­tail in­vestors are busily try­ing to un­earth the next Fortes­cue. Aus­tralia’s other iron ore pro­duc­ers are:

Port­man Min­ing ( 80 per cent- owned by US- based Cleve­land Cliffs), which pro­duces about 9 mil­lion tonnes a year from its Koolyanob­bing mine west of Kal­go­or­lie, and the smaller Cock­a­too Is­land mine on the Kim­ber­ley coast.

Mount Gib­son Iron, which pro­duces about 3 mil­lion tonnes a year from its Tal­ler­ing Peak mine east of Ger­ald­ton, and the same amount from its Koolan Is­land project, in Yampi Sound near Derby. Mount Gib­son is de­vel­op­ing the Ex­ten­sion Hill project near Tal­ler­ing Peak, which is ex­pects to pro­duce 3 mil­lion tonnes a year.

Ter­ri­tory Re­sources, which is ship­ping 2 mil­lion tonnes a year of haematite ( high­grade iron ore, 62 per cent iron or more) out of Dar­win, from its Frances Creek mines.

Murchi­son Met­als, which is pro­duc­ing 2 mil­lion tonnes a year from its Jack Hills haematite ore body in West­ern Aus­tralia’s Mid- West re­gion, and is look­ing to in­crease pro­duc­tion to 25 mil­lion tonnes a year in Stage Two.

Mid­west Cor­po­ra­tion, which pro­duces 1 mil­lion tonnes a year from its Weld Range project in the WA Mid- West, and is look­ing to bring three fur­ther projects suc­ces­sively on­stream, re­sult­ing in a planned pro­duc­tion rate of 45 mil­lion tonnes a year by 2015.

Then there are the hope­fuls, such as Gin­dal­bie Met­als, which has the Karara mag­netite ( lower- grade ore) project, west of Ger­ald­ton; Golden West Re­sources, which has a very high- grade haematite de­posit at Wiluna West, in WA’s north- east­ern gold­fields; Fer­rAus, which owns the Robert­son Range haematite project in the Pil­bara; Aquila Re­sources, which has 11,000 sq km of iron ore ten­e­ments in the Pil­bara re­gion ( the largest land- hold­ings in the Pil­bara re­gion apart from Fortes­cue, BHP Bil­li­ton and Rio Tinto); At­las Iron, which has 6000 sq km of iron ore ten­e­ments in the Pil­bara, in­clud­ing the flag­ship Par­doo project, 50 km in­land from Port Hed­land; BC Iron, owner of the Nul­lagine project in the Pil­bara; Re­source Min­ing Cor­po­ra­tion, owner of the Ar­gyle project, 120 km south of Wyn­d­ham in the north of WA; Polaris Met­als, which has sev­eral projects lo­cated in the South­ern Cross re­gion of WA; IMX Re­sources, which has started trial min­ing at its Cairn Hill prospect near Coober Pedy in South Aus­tralia; and Aurox and Fox Re­sources, which have highly prospec­tive Pil­bara ground.

Of th­ese, At­las Iron is the only other Aus­tralian iron ore miner sched­uled to com­mence ex­ports this year.

Gavin Wendt, se­nior re­sources an­a­lyst at Fat Prophets, cau­tions that the win­dow of op­por­tu­nity is only open for new play­ers if they can get up and run­ning and make some money in the next cou­ple of years.’’

Wendt be­lieves that only Gin­dal­bie Re­sources, BC Iron and At­las Iron have what it takes. Even then, I’m only look­ing at their haematite projects. We’ve put a red line through all of the hope­fuls’ mag­netite projects — the things that need hun­dreds of mil­lions of dol­lars of up­grad­ing.

Th­ese three have all got longer- term, big vi­sions to de­velop mag­netite projects down the track, but the prof­itable op­er­a­tions that they will have, that will give them at least a bit of a foothold in the mar­ket, will be their haematite op­er­a­tions. They’ll be small- scale — it might be 5- 10 mil­lion tonnes a year, over a five to 10- year mine life, but that should be enough to bring in a lot of cash,’’ says Wendt.

Peter Stra­chan, prin­ci­pal at in­de­pen­dent re­search firm Stock Anal­y­sis, says Reed Re­sources has an in­ter­est­ing project at Mount Fin­nerty, about 120 km west of Kal­go­or­lie.

Reed has a joint ven­ture with Port­man, be­cause of which they prob­a­bly have a good chance of get­ting a cou­ple of mil­lion tonnes mov­ing within the next year or two — that would just be an ex­ten­sion on the Port­man rail­road that goes through Koolyanob­bing and south to Esper­ance. It’s tiny tonnes, but Reed’s got 20 per cent of it, it might be a mil­lion tonnes a year. It’s good money for them, it’s a small com­pany and it’s good solid cash­flow,’’ says Stra­chan.

Stra­chan’s favourite po­ten­tial iron ore pro­ducer is Ven­ture Min­er­als, which is a long way from the cen­tre of iron ore ac­tion — it is in north- west­ern Tas­ma­nia — and has a mag­netite de­posit when haematite is all the rage. But Stra­chan ar­gues that Ven­ture’s Mount Lind­say project could sur­prise.

Al­though it’s in Tas­ma­nia, and peo­ple don’t as­so­ci­ate Tas­ma­nia with iron ore, Ven­ture is only 25 km from the Sav­age River mine ( op­er­ated by the Chi­nese- owned Aus­tralian Bulk Min­er­als), which has very good in­fra­struc­ture. It sends con­cen­trate by pipe­line to Port Latta in the north­west of Tas­ma­nia, where it’s made into pel­let.

Ven­ture could truck con­cen­trate to Burnie and ship it from there, or send it to Port Latta, pel­letise it and ship it from there. They also have tin in the mag­netite: they could re­cover a tin sul­phide con­cen­trate, which with tin at cur­rent prices, will pay for the whole thing.

Ul­ti­mately, Ven­ture has mapped out enough in­ter­est­ing ground that given a cou­ple of years’ drilling, they could even­tu­ally come up with 70 mil­lion- 100 mil­lion tonnes of mag­netite, which, min­ing 5 mil­lion tonnes a year, that’s go­ing to give them a 20- year project life, which could turn out to be a nice, lu­cra­tive project,’’ says Stra­chan.

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