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Australian iron-ore juniors hurting, some majors reviewing expenditure plans as prices slump

27th February 2015

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

  

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PERTH (miningweekly.com) – The recent free fall in the iron-ore price to its lowest level in six years has struck a deathblow to a number of Australian juniors operating in the sector, while the majors have been forced to cut back costs.

Commodity analyst Wood Mackenzie (WoodMac) blamed the lagging commodity price on a decline in demand from the Chinese steel mills during 2014, which unfortunately, coincided with a massive upsurge in global iron production.

Australian iron exports surged by some 140-million tonnes to 718-million tonnes during 2014, with the output based on investment decisions made several years ago, when the price for iron-ore was significantly higher and the long-term demand outlook was bullish.

WoodMac’s principal metals & mining consultant Roger Emslie noted that China’s import bill for iron-ore peaked at $112-billion in 2011, when the iron-ore price averaged $168/t, but by the end of 2014, this had fallen to only $95-billion, despite the volume of imports rising by over 100-million tonnes to 930-million tonnes during this time.

By the end of 2014, the price of iron-ore had declined to an average of $90/t, and by February, the price had declined to below $70/t.

The Australian Office of the Chief Economist noted that the market balance and the low price of iron-ore have been exacerbated by China’s domestic ore production, which was proving to be more resilient in the current pricing downturn. However, more of China’s production was expected to exit the market, but the Office of the Chief Economist warned that a longer period of even lower iron-ore prices might be required to push the supply out of the market.

The volatile commodity markets has caused a spate of Australian juniors to raise the white flag. Junior iron-ore developers Sherwin Iron and Western Desert were both forced to call in administrators during the course of 2014, after both failed to secure the necessary funding to continue their operations.

Fellow-listed producer Northern Iron has also warned its shareholders that the company’s viability was in jeopardy, given the current price environment, with the miner implementing a string of remedial actions in an effort to curb costs.

Iron-ore miner BC Iron, which owns the majority of the Nullagine joint venture with major Fortescue Metals, has also cut back on spending for the next year, along with implementing a range of other measures to reduce costs, which included terminating a higher-cost road haulage contract and a number of consultancy contracts, as well as implementing redundancies at the Nullagine mine site and at the company’s head office.

Another of the Pilbara staples, Atlas Iron, has announced plans to cut between A$65-million and A$90-million a year in capital costs, through a range of productivity improvements at its operating mines. The miner also implemented staff reductions at both head-office and operational level.

Atlas directors were not immune to the axe, with the number of board members reducing from nine to six at the end of December, while the remaining directors offered to reduce their remuneration by 15%.

Atlas chief Ken Brinsden recently pointed out that the company would only be spending some A$69-million in capital during 2015, down from the previous estimate of A$94-million, as the iron-ore price continued its decline.

Brinsden said that the capital spend savings would arise from a number of different avenues, including the forward spend on the remaining projects, and the deferral of a small amount of capital to the 2016 financial year.

Meanwhile, iron-ore heavy- weight Fortescue Metals also halved its expected capital expenditure (capex) for 2015, from $1.3-billion to $650-million.

CEO Nev Power told share- holders that the $650-million capital save would be obtained through the re-engineering of dewatering requirements, a reduction in exploration, the deferral of the detrital processing plant at the Solomon hub, in Western Australia, as well as the reduction and deferral of operational capex.

The company would also look to implement efficiencies in the construction of its Anderson Point berth 5.

During 2014, Fortescue completed its $9.9-billion expansion plans to bring its annual production to 155-million.

Despite this achievement, Power in October last year questioned major investments by majors BHP Billiton and Rio Tinto to expand their Pilbara output. BHP expects to produce 225-million tonnes of iron-ore a year by 2015, while Rio is ramping-up production to 360-million tonnes a year.

“There is no point continuing to expand just because you are a dollar cheaper than the guy next door to you. What we should be looking at is being responsible with our shareholder returns and making sure we are maximising those through our companies,” Power said.

“When the iron-ore price was at $180/t, there was no significant interest in expanding, but now with the iron-ore price at $80/t, suddenly everyone is talking about expanding. I find that a little odd.”

Some have also suggested that Rio and BHP’s big push into iron-ore was flooding the market, making it difficult for higher-cost producers to remain functioning.

Rio boss Sam Walsh appeared unrepentant about this development, saying in a recent analyst briefing that the company’s push into iron-ore was in the best interest of shareholders.

“I don’t feel any responsibility for [the death of higher-cost producers]. I’m sad for the communities and workers affected, but people need to realise that the mining industry is cyclical, its supply and demand and a whole wrath of things. And companies need to plan accordingly, which is why our focus is on Tier One assets.”

Walsh noted that in order to balance the market, a significant portion of supply would have to be extinguished.

“You can’t take off three-million or five-million tonnes and expect the prices to go through the roof. You have to take off sizeable chunks, and guess what happens when you take off 100-million tonnes; the price goes up and all those people who went out of the market would rush back in. The price will go back to where it was, and Rio’s production will be down by 100-million tonnes. That is not in the best interest of shareholders.

“So whether you like it or not, there is no OPEC in iron-ore. It is independent producers making independent decisions.”

Despite Walsh’s insistence that Rio’s iron-ore business was still making healthy margins, as the company produced iron-ore at a cash cost of some $17/t, the miner has taken note of the global commodity market and has cut back significantly on its global operating costs, targeting a $750-million save in 2015, above and beyond the $2.3-billion saved in 2014.

Fellow major BHP was also hoping to widen productivity gains by some $4-billion by 2017, and recently announced a spin-off of its aluminium, noncore coal, manganese, nickel and silver assets into a separately listed company dubbed South32.


WA Responds

Seeing the mire in which junior iron-ore companies were stuck, the Western Australian government moved to assist.

In December last year, the state government announced that it would introduce a 50% rebate on all eligible haematite iron-ore royalties for up to 12 months, subject to the iron-ore price remaining below an average of A$90/t over the period.

At the conclusion of the assistance period, the rebates will be fully repayable over a period of up to two years, with repayments to be made in accordance with a schedule to be negotiated between the producer and the Minister for Mines and Petroleum.

The Association of Mining and Exploration Companies (Amec) welcomed the move, adding that any relief government could provide during the current market conditions would be appreciated by the industry.

“Companies have just about reached the limit of cutting costs. The last thing we want to see is more retrenchments or closures,” said Amec CEO Simon Bennison.

Edited by Creamer Media Reporter

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