Comparative review
Recommendation
The iron ore boom is over. We prophesised the end in Iron ore: it’s (not) different this time and were a little smug in Iron ore: trumpets and warning bells as those prophecies turned true. With prices falling from peaks of almost $200 a tonne earlier in the year to just over $100 a tonne, many believe the worst is behind us. We disagree. Additional supply and falling demand from an unprofitable and oversupplied steel sector could see prices falling to $70-$80 a tonne. At that level, any local iron ore miner that isn’t BHP Billiton or Rio Tinto will struggle to make adequate returns on capital. It’s for that reason that we’re taking an axe to the sector.
Clever management and canny corporate action have helped Atlas Iron grow from a minnow to a multibillion dollar miner. Yet with a cost of production higher than the Pilbara giants, this is a business for believers in the boomtime. We’re not among them. Atlas will be the first iron ore stock we look at should we reconsider our views on the sector but, for now, AVOID.
As we’ve said before, iron ore is logistical science masquerading as mining. Digging up iron rich dirt is cheap and easy; transporting vast quantities of it to where it’s needed is the costly and difficult part. Consequently, the industry is no cosy place for small, underfunded wannabes. Gold mines, for example, can strike it rich with the right assets but in iron ore, deep pockets, access to infrastructure and long life assets are pre-requisites for success. Mount Gibson Iron, Gindalbie Metals, Northern Iron, Grange Resources, Cape Lambert Resources and Flinders Mines have all earned substantial market capitalisations through the boom yet all face one or more of those constraints. For each, we recommend you AVOID.
Even as Sundance Resources reached its peak and was a multibillion dollar business, we maintained the project would never be built. Two ports, 500km of railway lines and dozens of bridges were all needed to commercialise iron ore deposits in the heart of Africa. AVOID is being kind.
OM Holdings mines manganese rather than iron ore but that, like its metallic cousin, is a key ingredient in the production of steel. Like iron ore, supplies of manganese have exploded just as steel output appears to be faltering. OM is a decent miner with quality assets but, in this sector, there is no protection from lower prices. AVOID.