30/01/2014 - 10:32

Clear air for magnetite?

30/01/2014 - 10:32

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After five years in the financial sin bin there is a flicker of hope on the horizon for Western Australia’s magnetite iron ore processing industry, with Gindalbie Metals and Sino Iron in line for a revenue boost emanating from an unlikely source – China’s polluted environment.

Clear air for magnetite?

After five years in the financial sin bin there is a flicker of hope on the horizon for Western Australia’s magnetite iron ore processing industry, with Gindalbie Metals and Sino Iron in line for a revenue boost emanating from an unlikely source – China’s polluted environment.

Chinese government demands that the country’s steel industry cut emissions of sulphur dioxide and other damaging pollutants is forcing the steel mills to use more high-grade, low impurity raw materials.

That means a significant price premium is being paid for lump iron ore and part-processed products such as iron ore pellets and concentrate of the sort produced by Gindalbie and Sino.

In some cases, the premium offered for lump ore has risen to a level 15 per cent above that paid for conventional iron ore fines.

In dollar terms, the difference amounts to an extra $US18 a tonne for lump ore, lifting its price to around $US143 a tonne, whereas fines with a content of 62 per cent iron content are attracting a price of $US125/t.

Pellets and concentrate, which have even lower levels of impurities, have been attracting a price premium as high as $US40/t.

The price gap could widen further as government authorities enforce new environmental protection laws aimed at sintering, a step in the steel-making process whereby iron ore is ‘cooked’ to drive off impurities (generally into the air) before the material is smelted in a blast furnace.

Sintering gives off large amounts of sulphur dioxide, one of the worst forms of pollution and a cause of severe health problems for anyone exposed for long periods of time.

By increasing the use of lump, pellets and concentrate, the level of sulphur dioxide pollution can be reduced; and WA’s Pilbara mines are a prime source of increasingly scarce lump ore, and the magnetite projects an increasingly important source of low-sulphur feedstock.

The trend is certain to continue, with Chinese government authorities demanding that steel mills in provinces such as Hebei and Jiangsu significantly reduce pollution levels.

The extra cash cannot come soon enough for Gindalbie and Sino, and while it might not save either project from the need to continue receiving financial support from investors, it does represent a welcome break from the gloom that pervades both projects.

In the case of the wholly Chinese-owned Sino, the prospect of a price premium as part of a pollution reduction scheme could help both the project owner, Citic Pacific, and the man keen to see the start of royalty payments, Clive Palmer.

The war of words between Citic and Mr Palmer has spilled over into legal claims, which risk becoming a regular feature of the WA court system for years, before moving on to High Court, which has become a common debating forum for iron ore disputes.

In the case of Gindalbie, a price premium could be a get-out-of-jail card for its Karara magnetite mine, which steadfastly refuses to perform as promised.

In its report for the December quarter filed at the ASX last week, Gindalbie said the production ramp-up at Karara was continuing, but was only likely to reach 75 per cent of nameplate capacity by the end of March.

In the latest three-month period, Karara produced just 829,000 tonnes of iron ore concentrate, a rate which represents an annual output of 3.3 million tonnes from a project designed to operate at 8mt a year.

Unless Karara can get to that target of 8mt it will always struggle financially and probably require a fresh capital injection from the project’s Chinese partner, Ansteel, a step that could cut Gindalbie’s stake to 38 per cent, and perhaps lower.

Investment banks, which once formed part of the magnetite cheer squad that has been soundly rubbished in this column over the years, have started to lose patience with Gindalbie.

Perversely, the bean counters in the banks could be switching allegiance at precisely the wrong time, given the prospect of higher prices being paid for Karara’s premium grade concentrate, which is averaging 65 per cent iron.

No major stockbroking firm or bank has Gindalbie on its ‘buy’ lists. JP Morgan and UBS are neutral with suggestions that the stock, now trading at 10 cents, could get as high as 13 cents (UBS) or 14 cents (JP Morgan).

Macquarie and Credit Suisse are less forgiving. They see Gindalbie as a sell with price targets of 7 cents (Macquarie) and 6 cents (Credit Suisse).

Interestingly, UBS reckons that there could be another reason for hope in the magnetite sector – the falling value of the Australian dollar.

In an ‘upside scenario’, it calculated that if the iron ore price managed to rise by 10 per cent and the exchange fell by 10 per cent its net present valuation (NPV) of Gindalbie would increase by around 100 per cent.

Unfortunately, a ‘downside scenario’ of the iron ore price falling by 10 per cent and the Australian dollar rising by 10 per cent had a profoundly negative effect. “Under this scenario our NPV would reduce – 100 per cent”.

Ouch.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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