Bulk Buys: Grange Resources punching above its weight with absurd iron ore price premium as Vale and BHP report
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Tasmanian iron ore producer Grange Resources (ASX:GRR) has become well known for the quality of its iron ore and, while small in volume, makes up for it in tactical nous by supplying pellets that grade around 65%.
The Caleb Daniel of the iron ore community, the Chinese backed miner is a little fish in the Indian Ocean sized pond that is the seaborne iron ore trade.
As per its June quarterly yesterday Grange sold ~653,000t of pellets in the June Quarter from the Savage River mine at an average realised price of US$287.15/t ($373.72/t) FOB Port Latta, up from US$228.52/t (A$297.66/t) in the March term.
In other news… Wait. WHAT?!
Only the Quixotic interrobang can accurately punctuate the reality-melting nature of that premium clocking in roughly US$130/t higher than the prices generated by BHP and Rio Tinto in a quarter that saw prices in China hit record highs of more than US$230/t.
With operating costs down 20% to $90.16/t, Grange made a headline margin of $283.56/t or US$207.63/t, more than the average price of the benchmark 62% fines index in the three months to June 30.
Iron ore prices fell Monday in Qingdao by US$0.39/t to $221.04/t according to Fastmarkets.
65% Brazilian ore was fetching US$255.90, with an almost US$40 discount for sub-grade 58% ore. That tells you just how ludicrous the Grange result is, something that is sure to provide inspiration to high capex magnetite proponents hoping this boom persists long enough to get the projects that missed the last boom into production.
Grange’s bank account swelled from $258.64m with $73.38m in receivables at the end of the March quarter to $416.40m and trade receivables of $83.16m as of June 30.
On a generally bad day for the resources sector Grange soared by more than 8% in early trade before settling to a gain of around 6%.
Savage River is nothing new. It’s been operating for more than 50 years, something highlighted by the recent replacement at the mine’s processing plant of 53-year-old magnetic separators.
Luck has no doubt been on Grange’s side, not just with overall strength in the iron ore price but also the increased fervour for high grade products which have generated premiums from hungry Chinese steel mills looking to maintain production while curbing their emissions.
Like the plucky Bulldog, Grange is now looking at how it can make the transition from first 18 to All Australian by progressing studies on the proposed 5Mtpa Southdown Magnetite project near Albany on WA’s south coast.
“The second quarter of 2021 continued to see very strong iron ore prices. Grange continued to witness strong demand for our high-grade, low-impurity iron ore pellets,” Grange CEO Honglin Zhao said. “Our team continued to focus on optimising our life-of-mine plan at Savage River and operating in a disciplined manner in control of our costs.
“As the market for high-grade iron ore products is expected to remain strong, we are carrying out a prefeasibility study on a 5 million tonne per annum (mtpa) development case for our Southdown deposit in WA, building on the work performed from previous studies. We expect to complete the findings near the end of this year.”
A study during the last boom put a prohibitive ~$3 billion price tag on the project. It is anticipated the reduction to 5Mtpa from a previous 10Mtpa proposal would also roughly halve the capital cost.
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While there are a handful of outliers who think the iron ore bull market can run even higher from here, the number of analysts predicting the peak of iron ore is growing.
Whatever they say it is worth taking with a grain of salt.
No one really knows what’s going to happen given the opacity of the Chinese market.
Ausbil sees stocks markets continue to charge in the credit-fuelled post-Covid economy.
But the portfolio managers of its Global Resources Fund are not so bullish on iron ore prices, which they see tapering to US$170/t over the second half of the year before sliding to US$140/t in 2022 and US$110/t in 2023.
That would be half of current levels but still highly profitable for the big iron ore companies.
Charging prices this year have been supported by Vale’s failure to hit its original 375Mtpa guidance rate and the recovery of steel demand growth this year outside China even as Chinese demand has moderated.
But Ausbil sees those issues easing in the coming years.
“We are cautious on Vale production increases in subsequent years,” they wrote. “Vale are targeting a 400Mtpa run-rate by year-end 2022, however this likely only implies reaching that run-rate in the final quarter.
“The wet season and continued issues with restarts are likely to impact output leading into those run-rates, and as a result we currently estimate they will produce 355Mt in 2022 overall.
“Given this market backdrop, we currently forecast iron ore prices (62% Fines) to taper from current levels towards $170/t in 2H21, $140/t in CY22 and $110/t in CY23.
“Our expectations for demand strength and supply weakness continue and have been exceeded during this period, with COVID only exacerbating market tightness, through Chinese construction related stimulus and COVID-related supply issues in Brazil.
“Overall, we expect these supply and demand factor will ease over coming years.”
While Chinese steel production was tracking at a rate of almost 14% above 2020 levels, Ausbil sees Chinese steel consumption growth for 2021 at a milder 2-3% and easing by 3-4% year on year in 2022.
Ausbil has reduced its exposure in iron ore and diversified companies, going long on base metals, energy and battery materials stocks.
“While the diversified major resource companies (whose earnings are dominated by iron ore) may still outperform, given ongoing earnings upgrades, strength in balance sheets and free cash flow, limited M&A activity and strength in returns, we have a relative preference towards other commodities,” they wrote.
Supply constraints in the 1.5btpa seaborne iron ore trade have followed the Brumadinho tailings dam disaster in 2019, and while it believes it will be a 400Mtpa producer by the end of 2022, Vale is yet to show it can meet those sorts of targets.
It did at least make its revised iron ore guidance in its latest quarterly results.
Vale beat analyst expectations in iron ore production and sales in June, shipping 75.7Mt of iron ore to take its FY21 rate to 323.5Mt, within its 315-335Mt guidance range.
It sold 67,218t of iron ore in the June quarter, finishing the year just shy of 284Mt of sales. For reference, that was about 10Mt above investment bank RBC’s estimates.
At the same time Vale missed woefully on a whole host of commodities including coal, manganese ore and copper. Its pellet sales were also low, which RBC’s Tyler Broda said would likely drag down its realised prices.
Broda predicts Vale will ship around 359Mt of iron ore in FY22, suggesting it will recover somewhat, although it remains unclear whether it will meet is 400Mtpa target run rate.
BHP yesterday reported a record of 284Mt of sales from its Pilbara iron ore ops in FY21, but guidance remains broadly the same in 2022 with the world’s biggest miner expecting to produce 278-288Mt on a 100 per cent basis.
The company’s big focus is improving the overall grade of its product. The prices Rio and BHP receive for iron ore have lagged the benchmark 62% fines index as the best product has been blasted from their Pilbara mines.
BHP’s new 80Mtpa South Flank mine, which will be ramped up over the next three years, will increase the share of its ore shipped as the premium lump product to 33%.
That will make it the biggest lump producer in the world and increase the average grade of its WAIO division from 61 to 62%.
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One note that may have gone unnoticed in BHP’s quarterly was its downbeat view on trade relations between Australia and China.
BHP is looking to progressively exit its coal assets as investor pressure bites, particularly its thermal coal mines, having recently sold its stake in the Cerrejon mine in Colombia to Glencore.
It remains one of the biggest met coal producers in Australia, having produced 72.5Mt in FY21 on a 100 per cent basis at its Queensland joint ventures with Mitsubishi and Mitsui, roughly in line with guidance.
That included record production from its Goonyella mine. The notes included this doozy:
“Production is expected to be between 39 and 44 Mt (70 and 78 Mt on a 100 per cent basis) in the 2022 financial year as we expect restrictions on coal imports into China to remain for a number of years.“
Prices for Australian coking and thermal coal have recovered this year but are well short of the crazy prices China is paying after cutting off Australian imports, which have been redirected to other markets.
Last week it announced the release of 10Mt of coal from its strategic reserves, ostensibly in an effort to put a lid on prices.
Prices for hard coking coal were up Monday at US$267.15/t cfr Jintang and US$178.42/t (up US$1.75/t) for Australian product out of Dalrymple Bay, according to Fastmarkets.
A number of coal juniors were sitting in double digit gains this past week.
Bathurst Resources (ASX:BRL) meanwhile was up 67.4% for the week after winning an appeal in New Zealand’s Supreme Court that prevented a US$40 million to NZ based royalty holder L&M Coal Holdings.
It was the second lot of good news for Bathurst in a month, after announcing in June it would exceed its revised EBITDA guidance of $55.4m just months after knocking it down on the back of a stunning recovery in coal prices.