From Creamer’s:
New Zealand‘s billionaire Todd family stepped up bets on Australia‘s beleaguered iron oresector on Wednesday when iron ore prices slid to new five-year lows, boosting its stake in a company that aims to start producing in 2017.
Todd Corp agreed to buy A$4.5-million ($3.9-million) in new shares that Flinders Mines Ltd is selling as part of a A$6.7 million raising to fund a final study for its Pilbara Iron Oreproject, Flinders Mines said on Wednesday.
The A$1-billion project in Australia‘s richest iron ore belt aims to produce 25-million tonnes a year, which could make Flinders the country’s fifth largest iron ore producer.
“Flinders would like to thank Tio (NZ) Limited, a subsidiary of New Zealandbased Todd Corporation Limited, for their continued support of the Pilbara Iron OreProject…in what is a difficult market for junior developers,” Managing Director Ian Gordon said in a statement.
Here’s what Mac Bank says about the aspiring junior sector today:
We review our mid-cap iron-ore coverage following a collapse in sentiment for iron-ore stocks on the back of a US$11/t drop in prices in four weeks.
Sustained weakness in iron-ore prices: Iron-ore prices have been in steady decline over the past year, having fallen nearly 50% from US$140/t in early December 2013 to US$72/t currently. Iron ore equities have been falling in line with iron-ore prices, however once prices dipped below US$90/t the selloff has become more pronounced.
Time running out if spot persists: All four mid-cap iron-ore producers are not generating free cash flow at current spot prices on our estimates. If a recovery in prices is not forthcoming then production cuts or outright suspensions look inevitable. We note that strong cash balances could enable GRR to continue producing at a loss for 2.5 years, while BCI and MGX could continue for 2 years and AGO 1.5 years, which could delay any such decision.
Mid-cap producers need prices to rise: Stress-testing our iron-ore producers suggests that all four companies need prices to rise in order to
continue producing. Including meeting debt repayments, we estimate that iron-ore prices need to average US$78/t, US$85/t, US$85/t and US$93/t forBCI, GRR, AGO and MGX respectively for each company to remain cash flow positive and meet debt repayment obligations. Option value priced out: Given the collapse in sentiment for iron-ore stocks, we have effectively removed option value for iron-ore reserves and resources not currently in our production or development scenarios. The removal of this option value is a key driver behind the reduction in price targets across our iron-ore coverage universe and our recommendation downgrade for SDL.
Stocks pricing in some level of recovery: Removing resource option value from our price targets provides a clearer indication of what iron-ore prices are being factored in to current share prices. BCI is factoring in the lowest price at US$80/t, while GRR and AGO are factoring in US$85/t and MGX US$90/t. Outlook
MGX and BCI preferred names: We see value in MGX and BCI should ironore prices recover back to the mid US$80/t range. MGX offers good insulation to sustained weakness in iron-ore prices due to its large cash balance and BCI’s shares are currently factoring in the lowest iron-ore price.
GRR trading below cash backing: GRR is a higher-cost producer, however its current market capitalisation is lower than its cash balance, implying that the 20-year potential life at Savage River is worth effectively nothing. GRR can survive the longest at spot prices, but needs prices around US$85/t to break even.
Cautious on AGO and development plays: We remain cautious on AGO due to its higher debt levels and now have Underperform ratings on both iron ore development plays, SDL and FMS as we believe both companies need iron-ore prices to recover to levels closer to US$100/t in order to secure funding for their respective projects.
That large sucking sound you can hear is not the approach of future profits.
