Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Most Exciting Biotech Stock Of The Year? - 17th May 21
Gold Mining Stocks Fundamentals - 17th May 21
Junior Gold Miners Should be Rallying – What’s Holding Them Back? - 17th May 21
Stock Market - Should You Be In Cash Right Now? - 17th May 21
Learning the Financial Markets - 17th May 21
INVESTING IN HIGH RISK TECH STOCKS - ALL OR NOTHING - 16th May 21
Is Stock Market Selling Madness About Over? - 16th May 21
Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
Budgies Birds of Paradise Indoor Grape Vine Singing, Chirping and Flying Parakeets Fun 3D VR180 UK - 16th May 21
Wall Street Roiled by Hot Inflation Data: Is This REALLY “Transitory”? - 16th May 21
Inflation Going Stag - 16th May 21
CHIA Coins After 1st Week of Plotting 140 Plot 14tb Farm. Crunching the Numbers How to Win - 15th May 21
Tips to Create the Best Cross-Functional Teams - 15th May 21
Gold: Lose a Battle to Win the War - 14th May 21
Are You Invested in America’s “Two-Hour Boom” Fast Shipping Stocks? - 14th May 21
Gold to Benefit from Mounting US Debt Pile - 14th May 21
6 Solid Signs You Should Have Your Smart Device Repaired Right Away - 14th May 21
Ways to Finance Your Business Growth - 14th May 21
Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
How Much CHIA Coins Profit from 100 Plot 10tb Farm? Hard Drive Space Mining - 13th May 21
Stock Market Bulls Getting Caught in the Whirlwind - 13th May 21
Legoland Windsor Mini land and Sky Train Virtual Tour in VR 360 - UK London Holidays 2021 - 13th May 21
Peak Growth and Inflation - 13th May 21
Where’s The Fed? Watch Precious Metals For Signs Of Inflation Panic - 13th May 21
Coronavius Covid-19 in Italy in August 2019! - 13th May 21
India Covid Apocalypse Heralds Catastrophe for Pakistan and Bangladesh - 13th May 21
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Global Demand for Iron Ore on Rise

Commodities / Metals & Mining Apr 28, 2011 - 03:17 AM GMT

By: The_Gold_Report

Commodities

Best Financial Markets Analysis ArticleHow long until the window on rising iron-ore prices closes? Global demand is driving prices higher and shipping costs are at historic lows. But only companies poised to get into production quickly will be able to capitalize. In this exclusive interview with The Gold Report, Geordie Mark, an analyst with Haywood Securities in Vancouver, picks the companies that are ready to profit and those that are likely to get picked off by competitors.


The Gold Report: BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF), one of the world's largest suppliers of iron ore, recently submitted an environmental review for a proposed $48 billion expansion of the Port Headland Harbor in Western Australia to accommodate the doubling of iron ore production from its Pilbara operation. When a company's willing to spend $48 billion at one operation, what does that tell us about the long-term fundamentals about the iron ore business and, ultimately, the steel business?

Geordie Mark: The thesis there is one of global growth in steel demand resulting from continued industrialization from advancing economies, particularly China. At the moment, China produces somewhere near 45% of the world's steel.

On the back of that, India is continuing to grow its internal steel production at greater than world average rates. So, 37% of the world's population, which includes only China and India, has significant growth in its underlying steel consumption and demand.

If you take a step back, these countries are both in the juvenile stages of their steel use. They still have a long way to go in ramping up their countrywide infrastructure requirements. This trend is expected to continue for a number of years, if not decades.

TGR: Investors commonly think of China and India as the primary drivers behind steel demand. However, I have a November 2010 report from UBS, which estimates that steel consumption this year will rise by 4.5% in Europe, 4.5% in Russia and 5% in Brazil—a little bit more than India and China. The growth forecast gets even more bullish in 2012. Are Haywood's numbers similarly robust in countries outside of China and India?

GM: I would have to agree. China is obviously the main source of growth due to its size. For example, China's steel consumption is roughly eight times that of the U.S. But we are seeing significant growth from other countries, too. There are significant growth projections coming out of Europe, Russia and Brazil. The World Steel Association estimates global growth this year at 5.9% and 6% for 2012.

TGR: All that competition for iron ore is driving up the cost. China's imports of iron ore in the first quarter rose almost 15% to about 177 million tons (Mt). Meanwhile, the average import price was $156.50/ton in the first quarter, about 60% higher than in the year-early period. What are some ways to play this remarkable growth?

GM: To play the growth, investors could look to companies that are either entering into production or can enter production in this period of high prices, which we believe will be about five years. In the short term that could include companies entering into production this year in order to get near-term cash flow and strong margins. An example is Labrador Iron Mines (TSX:LIM). We expect Labrador to start production within about a month's time from a direct-shipping style operation.

Investors could also find growth in development-stage companies that could go into production within the window of high prices. For example, Northland Resources S.A. (TSX:NAU) has a project it anticipates it will start mining in late 2012 for high-quality iron ore concentrate product.

TGR: What's your prediction for prices a year out from now?

GM: This year we are forecasting an average price of around $139.50/ton for 62% Fe iron ore FOB Brazil. Next year, we forecast about $124/ton.

TGR: Why are the prices going down?

GM: We have taken a conservative approach to building our forward commodity price curve given known supply growth, as well as uncertainty surrounding seaborne transport rates. Furthermore, concordantly, the commodity has witnessed elevated pricing volatility whereby about a year ago, the industry came off an annual benchmark approach where the Big Three, that's Vale S.A. (NYSE:VALE), Rio Tinto (NYSE:RIO; ASX:RIO) and BHP, negotiated with steel producers on an annual basis to fix prices. The rotation of the mechanics of commodity pricing within this industry was a result of the underlying demand-driven environment, which now places the iron ore producers with a lot more say in negotiations.

World iron ore pricing rotated out of an annual benchmark into quarterly indexing and a greater reliance on the spot price markets. In the last first quarter and second quarter price negotiations, we have increases in prices for the Big Three, but as stated earlier we will also see greater volatility in the spot market relating to seasonal events and any fundamental policy changes out of China and other growth steel producers. Since we do see greater potential for volatility in the market going forward, we're resting on the conservative side for pricing.

TGR: The value of companies with iron ore assets or projects increased by an average of 400% between October 2005 and October 2010, whereas the value of metallurgical coal companies increased 34% during that same time, according to the UBS report. Steel companies were up 12% during that period. Part of that value creation is because steel companies have gone upstream and bought iron ore juniors to control the cost of supply. Do you expect that trend to continue?

GM: I would say the valuation metrics driving steel companies and companies with iron ore assets differ appreciably given that the steel companies work on operating margins and output growth, whereas companies with iron ore assets and projects have moved up because they're increasing the underlying resource base, lowering apparent risk by moving through development or entering production in a market with elevated commodity prices.

We do see vertical integration being a very significant component going forward for the steel producers. Steel producers want to hedge away from the Big Three. These companies want to be independent and integrate their cost management into locking up some of their iron ore at cost. Such integration enables steel companies to be more competitive when selling steel. We believe that there is likely to be continued vertical integration in the sector as steel producers lockup supply and protect the underlying cost base.

TGR: One example of that was when Cliffs Natural Resources Inc. (NYSE:CLF) bought Consolidated Thompson Iron Mines Ltd. (TSX:CLM)

GM: That's exactly right. Cliffs and Consolidated Thompson have a lot of operational synergies in the Labrador Trough. Cliffs was able to pay a good price for Consolidated Thompson. The Canadian operations had operational synergies, so that arrangement worked for Cliffs.

Another example of vertical integration would be Tata Steel Ltd. (LSE:TTST; Grey Market:TATLY) forming a joint venture with New New Millennium Capital Corp. (TSX.V:NML) on a direct-shipping ore project in the Schefferville-Labrador Trough, as well as participating in a bankable feasibility study on New Millennium’s large taconite deposits near Schefferville.

There is good vertical integration potential in the sector, particularly within areas that have existing infrastructure or reasonable assurance in terms of asset ownership. Canada is a very good home for such activity.

TGR: You recently revised your price target on Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF) from $3.90 to $5.80 after it published a resource estimate on its Kami iron ore project in Labrador. Was it the size of the estimate that made you revise your target?

GM: We were pleasantly surprised by the resource estimate. Alderon reported an Indicated iron ore resource of 490 (Mt), plus an inferred resource of 118 Mt. Just today, the company brought out some drill-hole results on North Rose, which is outside the defined resources, and looks as though it has potential to add resources. Alderon did surprise on the upside and we give it some more credit on that basis.

TGR: What were your thoughts after visiting the property and meeting management?

GM: My take is that the management is made up of very strong group, and this is married with a very strong board. A significant component of the current board is that many were also on the board of Consolidated Thompson during its pre-production stages.

In terms of the property, it's all location, location, location for infrastructure. The Kami property is within 15 miles of four operating mines with four options to get to a public rail system. Those components work well together for this project.

TGR: Would those factors make it a takeover target?

GM: It has potential. The main other component is that it is independently owned. There are no steel producers involved in the company at the moment. Its largest shareholder is Altius Minerals Corporation (TSX.V:ALS) because it originally held the property. I definitely think Alderon could be a potential takeout candidate in the long term.

TGR: Are there some other promising juniors that you follow?

GM: Another independent iron ore company in that same mining area is Champion Minerals Inc. (TSX:CHM). It has a portfolio of projects with around 1.5 billion tons of NI 43-101 compliant resources. Its flagship project, Fire Lake North, is not too far away from ArcelorMittal (NYSE:MT) existing Fire Lake Mine. Champion potentially still needs a little more infrastructure to come into play, but it has a very good portfolio of assets going forward. We have a target of $4.20 for Champion stock. Recently, it was trading at about C$2.38.

TGR: Any other juniors in the Labrador Trough there?

GM: I mentioned Labrador Iron Mines, which is entering production this year. It probably will produce just less than 1.5 Mt. of 62% direct shipping iron ore style product.

TGR: Who are the major shareholders in that play?

GM: The main shareholder is Anglesey Mining Plc. (LYSE:AYM). The second major shareholder is Passport Capital.

There is also New Millennium Capital Corp., which has a joint-venture project with Tata Steel, its largest shareholder.

TGR: Given Tata's large stake in New Millennium, it's probably not a takeover target. But are Champion and Labrador?

GM: Alderon, Champion and Labrador all have the potential to be taken out.

We are also looking at Northland Resources being one of the next producers, although it isn't in the Labrador Trough.

TGR: Where is that project located?

GM: It has two projects. Its flagship is the Kaunisvaara project in Sweden, which is fully permitted for production, and is in development at the moment.

Sweden has a long history of iron ore mining. This project would export out of Norway, and would probably be predominately selling to a European market. The project is expected to output a very high-quality product at around 69% Fe, and we think the company could fetch a good premium for the product.

TGR: What can investors expect in the iron ore market in the near term?

GM: Growth should continue to emanate out of China and India, and bolstered recovery is taking hold in Europe, particularly Eastern Europe, and North America. Another feature to look at is the cost of seaborne freight. There have been continuous lows in the market for seaborne freight because of surplus capacity that should continue for a number of years. Demand growth and lower transportation rates provide fantastic opportunities for pricing protection to moderate operating margins for projects entering production or at the development stage.

TGR: Thanks for your time, Geordie.

Dr. Geordie Mark, a research analyst with Haywood Securities, focuses on uranium companies involved in exploration, development and production. He joined Haywood from the junior exploration sector, where he was vice president of exploration for Cash Minerals, which concentrated on uranium and iron oxide-copper-gold targets across Canada. Prior to joining the exploration industry, Mark lectured in economic geology at Monash University, Australia, and served as an industry consultant. He completed his Ph.D. in geology in 1998 at James Cook University's Economic Geology Research Unit in Australia, specializing in aqueous geochemistry and igneous petrology applied to ore-forming systems.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2011 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Paige Gray
14 Dec 11, 11:28
Mark Nell

Hah, Italy demonstrators rally against Berlusconi


Post Comment

Only logged in users are allowed to post comments. Register/ Log in