Planning ahead key to iron ore before good times end
Sydney Morning Herald
Monday March 14, 2011
It was not that long ago that iron-ore prices were knocking on the door of $US200 a tonne, for the good stuff anyway. But the same sort of uncertainty and risk aversion that knocked the stuffing out of base-metal prices in recent weeks is also at play in the iron-ore market. Prices have come back to $US170 a tonne.Unlike most of the base metals, where prices are expected to recover - and the haven status afforded to gold and silver - there is a longer-term concern with iron ore as the market is racing towards oversupply.Encouraged by the bumper prices - it costs Rio Tinto and BHP Billiton no more than $US40 a tonne to produce iron ore in the Pilbara - there is an almighty expansion in global iron ore capacity under way.The world's biggest exporters (Rio, BHP and Vale) are leading the way, knowing that when the inevitable price crunch in response to oversupply does come, they will still be at the bottom of the cost curve.The big question is when will the crunch come? It is not that far off, raising fears for the dozens of Aussie iron-ore hopefuls that are yet to get into production or which don't yet have a solution to their rail and port infrastructure shortcomings.Goldman Sachs reckons that the iron-ore market will move into oversupply in 2014 and that "prices will fall significantly at that time".It is forecasting modest oversupply in the traded (seaborne) market in 2013 of 48 million tonnes, or 4 per cent, growing to a surplus of 147 million tonnes, or 12 per cent, in 2014 and some 266 million tonnes, or 20 per cent, in 2015.To put that in perspective, BHP is producing at an annual rate of 148 million tonnes from its Pilbara operations. So as early as 2014, an equivalent amount of iron ore - be it from the Pilbara or anywhere else - will be surplus to demand.There are no prizes for guessing that prices will come tumbling down at that point. Goldman Sachs estimates a price in 2013 of $US115 a tonne, falling to $US85 a tonne in 2014 and $US80 a tonne in 2015. It didn't say so, but $US80 a tonne is also roughly the price at which iron ore production in China and India becomes uneconomic. So even at the lower levels, Australia's greatly expanded iron-ore production will find a home. It's just that the current magical profitability of the sector is not going to last.The lesson in all this is that investors in iron-ore stocks need to plan ahead.On current thinking, the music for iron-ore stocks will stop late next year or early in 2013.MORE RICHESIt might be 2011 but Australia still boasts an under-explored minerals frontier, one that just might be home to world-class nickel, copper, gold and platinum deposits that have remained hidden under sand cover.It is the Musgrave Province, which straddles the common borders of South Australian, Western Australia and the Northern Territory.A taste of the province's mineral potential came in 2000 when WMC Resources, now part of BHP Billiton, discovered the Nebo-Babel deposit in its WA portion.Not much has happened since. The province is seriously remote and getting access agreements with traditional owners can be a slow process. The hidden mineral wealth is also covered by, on average, a 100-metre-deep blanket of sand.But in one of the most unusual floats ever seen on the local market, a bunch of mining companies and explorers have decided the province - at least the SA portion - might best be explored on a co-operative basis.They are combining their exploration interests in the province and raising $15 million for future exploration through Musgrave Minerals Ltd.The six companies contributing exploration ground are Mithril Resources Ltd, Independence Group, Goldsearch, Argonaut Resources, Integra Mining and Canada's Barrick.The 60 million shares at 25 from the float will account for 60 per cent of the company on listing, with shareholders in Mithril, Independence, Goldsearch and Integra to get a priority entitlement to 40 million of the new shares on a first come, first served basis.All up, the company will hold some 50,000 sq kms of exploration tenements, equal to 5 per cent of SA's land mass.Converting some of the province's minerals potential into reality is the job of the newly appointed managing director, Robert Waugh.He is a seasoned campaigner with more than 24 years' experience in the resources game, including an eight-year stint in the Musgrave Province as part of the WMC exploration team that discovered Nebo-Babel.
© 2011 Sydney Morning Herald