Minefield: Small ore rising

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Life has returned to the small end of the iron ore mining industry after three bruising years, but for how long is a critical question.

An unexpected surge in the iron ore price when combined with lower costs is helping financially-stretched miners retire debt and dust off expansion plans.

It's not a boom, but it is a welcome reprieve from conditions which forced many small iron ore miners out of production, unable to compete with the low costs of the mega-miners such as BHP Billiton, Rio Tinto, Fortescue Metals, and Brazil's biggest miner, Vale.

While the price rise from less than $US40 a tonne at this time last year to around $US83 today is helping everyone exposed to iron ore, the real key to the revival is the cost side of the equation, as shown in this week's December quarter report from Fortescue.

Five years ago, Fortescue was enjoying a gross profit margin of around $US72. Today, even with the iron ore price down 33 per cent from its 2012 average of $US120, the profit margin is roughly the same thanks to costs falling from $US48 to $US12.54.

A similar picture can be seen across the iron ore industry, with the combination of a higher price and lower costs helping small miners reset their businesses to handle what some analysts believe will be a return to lower prices later this year.

Credit Suisse is tipping a price of $US55 as the 2017 average, falling to $US48 in 2019. Macquarie sees $US54 falling to $US47 next year. UBS reckons the price will average $US56 this year.

ANZ disagrees. It is forecasting $US71 for the first three months of 2017 with an average of $US67 for the year.

Those price tips are a guide to what might lie ahead. In the meantime it's worth looking at some of the recent action in the sector and the revival in fortunes for some small iron ore stocks.

Atlas Iron (AGO)

Once a star with a stockmarket value of $4 billion, Atlas suffered a near-death experience in 2015 when a low iron ore price and high operating costs forced the company into a debt-for-equity swap with its creditors.

That deal exploded Atlas's share register tenfold, from 915 million shares in 2014 to 9 billion shares today, with the dramatic increase in the number of shares on issue a factor in the stock spending most of 2016 at 1c, or less.

Since early October, as the iron ore price staged its miraculous recovery courtesy of Chinese demand, Atlas has been moving up, briefly touching a 12-month high of 5c, before slipping back to recent sales at 4.4c, a price which values the company at $402 million.

Atlas has a long way to go before it can be described as rebalanced, thanks to last year's monster share issue which left 70 creditors (mainly service providers and investment funds) owning 70 per cent of the stock. Many of them should be seen as potential sellers.

Set against the problem of an unstable share register is the improving financial health of the company, which is trading profitable. Atlas made a hefty ($54m) debt repayment last month and earned a credit-rating upgrade from Standard & Poor's.

At the current iron ore price Atlas is posting strong profits and preparing to develop a new mine at Corunna Downs, which will replace the ageing Wodgina operation.

Because it trucks ore to Port Hedland, an expensive way of handling a bulk commodity, Atlas will never be able to match the low costs of the bigger miners with their railway systems.

But if the iron ore price stays high, or just slips back to the $US67 forecast by ANZ, Atlas will achieve its primary aim of survival, and with Corunna Downs to come it should achieve its next goal of having more cash than debt by mid-year.

Mount Gibson Iron (MGX)

The last time Minefield looked at Mt Gibson was seven months ago when it was trading at 27c and sitting on a cash pile of $400m from mining operations and a big insurance payout.

This week, the stock is trading at 37c and the cash pile has grown to $447m, roughly $34m more than the company's stockmarket value of $413m.

In horse-racing terms Mt Gibson is a stayer, having survived the iron ore price crash and the collapse of a retaining wall which led to the flooding of its flagship mine on Koolan Island off WA's Kimberley coast.

Ongoing iron ore production is coming from a series of small but high-grade deposits near Geraldton in WA with the Extension Hill pit recently worked out and the new Iron Hill scheduled to start in the current quarter.

What's next for Mt Gibson includes a possible restart of mining at Koolan Island and the possible development of additional deposits near Iron Hill.

A wildcard in the company's hand is a second insurance payout for business interruption at Koolan Island, topping up the $86m already received for property damage.

Investment banks have a mixed view of Mt Gibson, with Macquarie highlighting the 40c per share cash backing for a stock trading at 37c.

Flinders Mines (FMS)

Until last week not many investors had heard of Flinders Mines, a stock with a plan to become a WA iron ore miner but with a share price of less than 3c and a market value of less than $100m.

That changed suddenly when its biggest shareholder, New Zealand-based Todd Corporation, unveiled plans for a major iron ore project near Karratha on WA's north-west coast.

The Balla Balla project of Todd is not new. The ore deposit has had several owners over the past decade, include Atlas Iron, and will be expensive to develop and operate because it contains a low-grade form of iron called magnetite, the same material which has caused former billionaire, Clive Palmer, and his Chinese partner problems at their Sino Iron project.

The proposal which Todd unveiled for Balla Balla includes infrastructure assets that could provide a railway to link the iron ore assets of Flinders with the port needed for Balla Balla.

There is a long way to go for both Balla Balla and the Flinders proposal, and some of the current interest is probably related to the WA State election in early March.

Speculators, however, like the story and have pushed Flinders shares up to a 12-month high of 8c, valuing the stock at $250m.

BC Iron

Three months ago BC Iron, a company effectively controlled by media owner Kerry Stokes, was showing every sign of losing interest in iron ore, with a management presentation at the November annual meeting suggesting a diversion into agriculture, industrial minerals and/or goldmining.

Whether that happens will be a reason to watch the company. BC recently sold a small mine at Nullagine in WA's Pilbara, has plans for a much bigger mine (and associated port) at Buckland and continues to share the profits from a joint venture mine operated by Mineral Resources at Iron Valley.

The iron ore recovery will have presented BC with an opportunity to push ahead with the wholly-owned Buckland project or take the opportunity to do something else with its $32m in cash.