Slowly but surely the sacred cows of iron ore investing are plodding to the knackery. For the first time I can remember, folks are beginning to question the value of the big miners and their various plays during the boom. Cheering the death of the contract system is one, from EIM Capital Managers chief investment officer Tony Wiggins:
…”What’s really dangerous and very important is that the big diversified resources in their wisdom changed the pricing regime for the bulk commodities after they saw the cyclical highs of base metals and they thought they were missing out…these characters have moved the iron ore price to spot sales and the correlation coefficient between copper and iron ore is about 90 per cent. There is no more diversification benefit from owning a diversified mining company…BHP is the lazy default position to be in. The diversified mining house that was there 15 years ago doesn’t exist anymore…The steel business is gone – somebody else owns that. Iron ore, coal and copper are trading lock-stock together instead. They’ve got oil, but it’s just as liquid as the other resources.”
Yep, and that does not even mention the dependence upon one country, nay, one sector of one country, Chinese property.
At least policy-makers saw through the myopia and applied a large resource rent tax that saved much of the proceeds of the boom in a sovereign wealth fund that prevented the hollowing out of non-mining tradable sectors, cough…
Another untouchable truth that’s under fire is that Rio Tinto is going benefit from the current shakeout. Sure it will, eventually, but not before it doesn’t:
Rio told its customers on Tuesday night that it would increase discounts from 6 per cent to 13 per cent from July 1.
This applies to its 57 per cent FE Robe River fines and will see Rio receive about $US73 a tonne for its low-grade product.
The iron ore price has fallen 34 per cent this year to be trading at $US89.30 a tonne. This is the first time it has traded below $US90 since 2012.
The price reductions offer by Rio for its low-grade ore are broadly in line with the discounts being given by Fortescue.
Another is that all investment is just dandy and that Rio Tinto will benefit at all long term:
FALLING iron ore prices and a dwindling share price have done little to dent the enthusiasm of Sundance Resources chairman George Jones, who has set a tight timetable for the group’s ambitious $4.5 billion fundraising efforts.
…Acknowledging that many in the market viewed Sundance’s plans to develop its large but remote Mbalam iron ore project — which sits in jungle on the border between Cameroon and the Democratic Republic of Congo — as an “impossible dream”, Mr Jones said there had been strong interest from a range of potential financiers and partners.
He pointed to his previous success at iron ore miner Portman, where he grew the market capitalisation from $12 million to $3.2bn, and the success of Andrew Forrest in financing the development of Fortescue Metals Group’s Pilbara iron ore assets as proof that Sundance’s goals were achievable.
The Chinese money that may or may not go into this project has no other intention than one: crushing iron ore prices permanently. Which is also how the West Pilbara kerfuffle aught to be viewed. Both the takeover of Aquila by Baosteel and the plan for Ankatell Port aren’t markets responding to price signals:
Morningstar Resources analyst Mathew Hodge said Baosteel wanted control of Aquila.
“If you’re a pessimist you would say they want to have something sizeable where they can add meaningful supply to the global market to reduce the cost of iron ore for China,” he said.
The West Pilbara Iron Ore project would only be financed with Chinese money, he said.
WP iron ore is nearly all 58% grade and lower, that area of the market in which oversupply is most chronic. Massive new supply that is cheaper and better will be poring forth for years yet from existing tenements and infrastructure.
Add in China’s structural adjustment as well as the lead time for development and West Pilbara makes very little sense.
