BC Iron: production upgrade

There is a lot to like about iron ore miner BC Iron. Mining a joint venture with Fortescue Metals, the company aims to ultimately produce about 4.5m tonnes of iron ore a year and its costs are relatively low. Cash costs of about $50 a tonne may not match Rio Tinto or BHP but, for a small operation in a business where scale matters, this is impressive. The company even announced better than expected production and expects output to top 3.2m tonnes this year.

Low costs come courtesy of geology. BC Iron’s resources are close to surface so rather than having to drill and blast ore and then haul it for processing, surface mining equipment peels away layers of the earth to capture the resource. It’s an efficient, low cost operating model.

Infrastructure dilemmas are also being solved. Once mined, ore is simply trucked to Fortescue’s rail facilities where it is then hauled to port; and there is latent capacity to boost future production. With net debt of just $36m, the company can’t be accused of being over geared either. At current iron ore prices, the business generates attractive rates of return and could produce plenty of free cashflow.

What’s the catch? BC Iron works at current prices, but at lower prices economics change quickly. The company’s low grade resources attract a discount to benchmark prices. So if the iron ore price falls to $100 a tonne, BC Iron may get $80-$90. As explained in Iron ore: It’s (not) different this time (Avoid – $2.51), prices could fall far lower, squeezing operating margins. Believers in the iron ore price may take a different view but, despite its attractions, we’re sticking with AVOID.