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#Bear Case
Last edited 3 years ago

12-Dec-2020.  I don't follow this company, but I would caution against getting too excited about smaller producers who have higher costs than the big 4 (FMG, RIO, BHP & Roy Hill) particularly when a major part of the record US$ iron ore price levels we are seeing is Vale in Brazil having major issues.  Vale, who are a major global iron ore supplier, will get on top of those issues eventually, and I can tell you that China would much prefer to be buying their iron ore from Brazil than from Australia at this point, while we're still in the doghouse, and seen as the lapdogs of the USA.  I don't think Brazil have enough iron ore to satisfy China's demand, so iron ore is likely to continue to escape the tariffs and other charges that China are slapping on our Barley, Wine, Seafood, etc.  However, once Brazil's biggest iron ore player, Vale, get back on their feet and back into full production (i.e., post-Covid-19), you will not see iron ore at these elevated levels.  At current prices, there will be a lot of smaller iron ore miners rushing back into production, because they can once again make money, however - for how long, when the iron ore price normalises - or returns to its mean.  It could be short-lived returns to production.  If you want to back an iron ore miner, I would suggest targeting a low cost iron ore miner.  

Champion Iron recently reported that their Free On Board ("FOB") total cash cost was A$48.5/dry metric tonne ("dmt") (US$36.4/dmt) ("Total Cash Cost") and A$53.1/dmt (US$39.1/dmt) for the three and six-month periods ended September 30, 2020, respectively, compared to $48.3/dmt (US$36.6/dmt) and $51.4/dmt (US$38.7/dmt), respectively, for the same periods in 2019.

And they are operating out of Quebec, Canada, not WA.

Western Australia’s iron ore miners are among the world’s lowest cost seaborne iron ore exporters. The average total cash cost of Western Australia’s iron ore exports was US$29.6 a tonne in 2019, well below the world average of US$40.9 a tonne, and below its main competitor in Brazil (US$36.1/t).

Western Australia’s major iron ore ports are also close to the largest iron ore markets in Asia, reducing shipping costs relative to some of its competitors.  According to Wood Mackenzie, Western Australia’s average iron ore freight rate to China rose 2% to US$7.70 a wet tonne in 2019, well below Brazil’s rate of US$18.60 a wet tonne.  Not sure what the rate from Canada is, but it's certainly higher than $7.70/tonne.

With an iron ore price at 2015 to 2018 levels (US$55-$72) I reckon Champion Iron and other smaller iron ore miners are losing money, once you take ALL of their costs into consideration.

They could be good for a shorter term trade, but I wouldn't pick them for a longer term investment.

Further Reading:

That last link, directly above, is one I highly recommend reading.  It has been put together by the WA Government (Dept of Jobs, Tourism, Science and Innovation) and it really highlights the competitive advantages of WA's larger iron ore miners.  I currently don't have direct exposure to any of them - I would buy FMG and MIN at lower prices (much lower prices), but always for a trade, not a long-term hold.

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