28/09/2016 - 13:28

Iron ore survivors plan reset

28/09/2016 - 13:28

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A couple of smaller miners that rode out the slide in iron ore prices could be the early movers in a more widespread revival in the sector.

A couple of smaller miners that rode out the slide in iron ore prices could be the early movers in a more widespread revival in the sector.

Two survivors from the massacre of small iron ore stocks when the price collapsed four years ago are dusting off plans to expand output of iron ore, despite it selling for $US56 a tonne, less than half its boom-time price.

Mount Gibson Iron and BC Iron are confident they will be able to operate profitably thanks to the collapse in costs for everything from capital equipment to labour. 

And while the price of iron ore could dip below $US50/t, it seems unlikely to fall further because of delays to new projects such as Gina Rinehart’s Roy Hill mine, and production disruptions at other mines in WA and Brazil.

The changed financial environment for iron ore is flowing through to other parts of the WA economy, which became overheated during the boom – a time when even a part-time cook could demand, and receive, a wage of more than $100,000.

Mine closures, cancelled development plans, and heavy job losses have significantly changed the structure of WA’s mining industry, and while some workers have found jobs in the reawakening goldmining sector, there are signs of growth returning to iron ore.

BC Iron, which is a co-owner of the Iron Valley mine in the Pilbara operated by Mineral Resources, has unveiled plans to develop its Buckland mine, construction at which is expected to start in the June quarter next year.

The proposed new mine is likely to be more profitable than Iron Valley, which produced 1.4 million tonnes of ore in the first two months of the current financial year, above an expected rate of between 1mt and 1.2mt.

BC Iron said that Iron Valley was: “On track to comfortably achieve the company’s current financial year pre-tax earnings guidance of $6 million to $16 million” (a wide gap in forecast profits that allows for a range of production and price assumptions).

Investors are warming to the prospect of a revitalised production and profit performance by BC Iron, lifting the company’s share price by 4 cents (30 per cent) over the week to June 16 to recent sales at 17.5 cents, a level more than double the 7.7 cents low of earlier this year.

BC Iron’s revival, which will be welcomed by the company’s major shareholder, local media and industrial equipment billionaires Kerry Stokes, is interesting, but not nearly as interesting as the potential revival of Mt Gibson, an iron ore miner that faced a threat to its survival when its best asset, the Koolan Island mine, was forced to close after the collapse of a sea wall.

Koolan Island was always considered a risky project because the open pit north of Derby in WA’s Kimberley region is immediately adjacent to the Indian Ocean, with its ore located below sea level.

Originally developed by BHP Billiton in the 1950s, Koolan Island contains very high grade ore that commands a premium price, but the only way Mt Gibson could redevelop the mine was to repair a seawall and dewater the mine (which worked well until late 2014 when the wall failed and the pit flooded).

Few analysts expected Koolan Island to be revived, partly because of the cost, partly because of the technical complexity of repairing the wall and dewatering the mine (again), and partly because of the falling iron ore price and high WA costs.

Conditions are changing, however. The iron ore price has stabilised, costs are a lot less than two years ago, and Mt Gibson has found itself in the fortunate position of receiving an $86 million insurance settlement for the seawall failure (with more possible if a business interruption claim is successful).

The improved outlook, especially on costs, has prompted a detailed examination of getting Koolan Island back into production. Investment bank Macquarie is warming to the financial appeal of a mining restart based on what looks to be an attractive financial case.

According to Macquarie, a restart is highly likely because the total capital cost of repairs would be around $90 million, which would provide access to at least 17mt of ore, sufficient to ensure annual production of between 3mt and 4mt a year.

Given the high-grade and premium price for Koolan Island ore, the mine should be able to operate at a break-even price of $US35/t. Assuming an iron ore price of $US50/t, the mine could yield up to $US60 million a year in pre-tax profit for an internal rate of return on capital invested of a very attractive 55 per cent.

Macquarie noted that Mt Gibson had not provided any guidance on the cost of rebuilding the seawall or bringing the mine back into production, but its analysis assumes that: the total capital cost would be less than $90 million; ore reserves are at least 15mt; and the indicated ore resource is 33.5m/t at 65.7 per cent iron.

As with BC Iron, there has been a positive reaction by investors to the possibility of Mt Gibson redeveloping Koolan Island, with the company’s share price up from 16 cents earlier this year to recent sales at 28.5 cents.

Macquarie is tipping a 12-month share price target for Mt Gibson of 47 cents because of the mining plans and the company’s fat bank account, which contains $420 million from residual boom-time profits and the insurance settlement

In both cases, BC and Mt Gibson, survival can be traced to an ability to maintain cash flow during the toughest years from secondary operations – Iron Valley in the case of BC Iron, and the Extension Hill and planned Iron Hill projects of Mt Gibson in the Mid West.

Having survived, they are now re-emerging into a lower-cost environment, potentially being the early movers in a more widespread revival among small iron ore miners.


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