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Iron-ore’s tumble seen continuing till end of 2015

28th November 2014

By: Bloomberg

  

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With prices at a five-year low, only a handful of companies worldwide can make money selling iron-ore, according to UBS. Some Chinese mines have closed, while Western Desert Resources and London Mining have already failed. Pessimistic analysts expect the commodity to slide at least a further 14% before the end of 2015 as a supply glut continues.

Among the most vulnerable are Western Australia’s Atlas Iron, BC Iron and Gindalbie Metals, according to Fat Prophets. All three – valued last week at less than $200-million after dropping 75% or more this year – are struggling with production costs that are too high for the current market. Private funds such as X2 Resources, which has raised as much as $3.75-billion from investors, may be able to pick up bargains before an iron-ore rebound makes the assets viable, says E&Y.

“The smaller miners in both China and Australia could be the collateral damage,” says Freya Beamish, a Hong Kong-based economist at Lombard Street Research. “Iron-ore prices are on a structural downturn that could play out over several years.”

The price slide has put even the biggest producers in play. Glencore in July approached Rio Tinto Group with a deal that would have created the world’s largest mining company. Rio rejected the proposal the following month.

Iron-ore has fallen 48% this year, partly on concern that China’s economic slowdown will weaken demand for the steelmaking material. At the same time, BHP Billiton, Rio and Vale have increased production to bolster their market shares, creating a glut and preventing a price rebound any time soon.

The commodity, approaching $70/t, will fall to less than $60/t in the third quarter of 2015, forecasts Citigroup. Only BHP Billiton and Rio, the world’s two largest mining companies, and Pretoria-based Kumba Iron Ore, controlled by Anglo American, produce profitably at that price.

“For those in the high-cost area, it’s a case of survival,” says Mike Elliott, Sydney-based global leader for metals and mining at E&Y. “If you’re only ever going to make money at the peak of a commodity price cycle, then you may call it quits.”

Distressed Assets

A representative for BC Iron had no comment on the company’s breakeven price for iron-ore or the prospects of a takeover. A representative for Atlas Iron and Gindalbie did not return a call seeking comment. All three companies are based in Perth.

London Mining, valued at more than $800-million in 2011, went into administration in October. Just hours before the company’s Marampa mine, in Sierra Leone, was set to close, it was bought by Timis. Credit also dried up in September for Western Desert, which operates the Roper Bar project, in Australia’s Northern Territory. Receivers have started to look for potential buyers.

It is not only tumbling prices that are threatening smaller producers. Companies unable to recover their production costs also find it harder to obtain financing, while project writedowns become more likely, says Greg Smith, head of research at Sydney-based Fat Prophets.

“There are going to be plenty of assets around or mothballed operations, if it gets to that,” says Smith.

Some miners that are close to breaking even at the current iron-ore price might be able to withstand the commodity’s slump by halting production until the market picks up, says Elliott. Those that cannot may also be targets, he adds.

Funds such as London-based X2 Resources, cofounded by former Xstrata CEO Mick Davis, are logical buyers, according to Elliott. Some funds can wait years before profiting from an investment and may be able to buy the assets “relatively cheaply”.

Resources companies sitting on millions of tons of reserves, mining licences and other assets may also appeal to activist investors who could push for changes to boost returns. For instance, a breakup of Arrium, the iron-ore producer that has fallen 83% this year, might unlock value in the company’s unit that makes rail wheels and metal balls, Morningstar said last month.

Shares of Atlas Iron, which digs for iron-ore in Australia’s Pilbara region, have tumbled 82% this year. This is even after the company cut capital expenditure and raised cost-saving targets. BC Iron has dropped 89% and Gindalbie has plunged 75%.

According to UBS estimates, Gindalbie started losing money when iron-ore fell below $98/t, while Atlas and BC Iron became unprofitable when the price dropped through about $80/t.

The stock collapses reflect doubts the companies will ride out iron-ore’s price slump, says Shannon Rivkin, a director at Rivkin Securities, in Sydney.

“It’s guaranteed that we’ll see a lot more companies go out of business,” Rivkin says. “There will be buyers but they’re going to have deeper pockets and longer timeframes. Iron-ore prices are not going to be this low forever.”

Edited by Bloomberg

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