More sell side iron ore myopia

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From Gina’s iron ore newsletter today:

JPMorgan argues the focus on this deal risks over-shadowing one of the mining giant’s most important recent developments, its expanded iron ore production in Western Australia.

…Although JPMorgan has not lifted its rating on the stock, it has outlined a bullish scenario for the company’s WA iron ore business, calculating total export volumes could soar to 310 million tonnes per annum (Mtpa).

…The bank is also impressed by the potential returns from the US$3.2 billion expansion, pointing out that the internal rate of return (IRR) is likely to rise to 21 per cent and may head higher given that some of this cash may already been spent.

And I’ll say the same thing of JPM that I said to UBS:

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  • 225mt at $90 per tonne is $9 billion profit
  • 310mt at $80 per tonne is $9.3 billion profit
  • 310mt at $70 per tonne is $6.2 billion profit

The potential margin squeeze is much more damaging than the potential volume growth and when the iron ore price falls to its new equilibrium level then ROE will get smashed.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.