Bulk Buys: Haircut for iron ore on steel production cuts, MinRes deal sends Red Hill Iron to the moon
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Iron ore prices fell to their lowest level in two and a half months on the back of noise about steel production cuts in China on Friday, only to moderate on Monday.
A 7% flop in iron ore prices to a little over US$180/t to end last week would have sent shudders down the spines of investors in the big miners.
It came after weeks of discussion about China’s plans to cut steel production over the second half of 2021 in the world’s No 1 steel making and manufacturing economy.
On Monday that fall moderated, with benchmark 62% fines rising by US$2.85 to US$184.42/t.
Was it a dead cat bounce, or a sign that, as many analysts believe, it would simply not be possible for China to shave the 100Mt needed off its second half steel output to return to 2020 levels?
The reality is it’s a complicated equation, as the CCP has found in previous attempts this year to jawbone down the price of Australia’s most valuable commodity.
Ironically steel output cuts may knock down sentiment in the short term, but provide price support in the medium term by increasing the value of steel itself and therefore margins.
“The sudden decline in steel prices in mid May was triggered when policymakers said they were looking to curb speculation in commodity markets,” Commbank analyst Vivek Dhar said.
“Their ultimate concern was that high commodity prices would translate through to consumer price inflation.
“Steel output cuts, especially the magnitude being discussed in H2 2021, is likely to boost steel prices and threaten inflation concerns once again.
“That could see policymakers look to reduce steel prices – potentially walking back nationwide cuts to steel output.”
The cycle continues.
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There was clearly no greater winner in the Bulk Buys universe over the past week than Red Hill Iron (ASX:RHI).
Red Hill held a 40% interest in the Red Hill Iron Ore JV with API JV, a high powered consortium that controlled the greater West Pilbara Iron Ore Project.
It had just $92,000 in the bank when Chris Ellison’s Mineral Resources (ASX:MIN) came calling last week for its stake, having previously bought haulage experts Aurizon out of a 7.5% stake in the overall APIJV.
That will put, potentially, more than $400 million cash into the small cap’s pocket.
$200 million will be paid on settlement of the transaction alone, with another $200 million to be paid on the start of commercial shipments from the tenements.
Red Hill could also receive consistent revenue should MinRes coax the APIJV into production, with the junior due to receive a 0.75% FOB royalty on every tonne sold from the RHIOJV and MinRes’ Bungaroo South tenements.
The deal shows just how desperate mid-level producers with growth ambitions like MinRes are to lock in tonnes and ramp up iron ore production at a time of near-record prices.
MinRes produces a bit under 20Mtpa between its Pilbara and Yilgarn iron ore assets, but is aiming to become a clear export leader outside the big four by developing a substantial 30Mtpa operation around its Ashburton hub.
“We are pleased to have reached agreement with Red Hill Iron to acquire its participating interest in RHIOJV. The transaction is in line with our strategy to build own and operate infrastructure assets to unlock stranded iron ore deposits in the Pilbara and build a long-life, sustainable iron ore business exporting out of Onslow,” Ellison said.
“The RHIOJV holds a sizeable iron ore mineral resource in a strategically significant location in the West Pilbara. MRL’s proposed acquisition of RHI’s participating interest in the RHIOJV will enhance the company’s iron ore footprint in the West Pilbara as we progress our Ashburton Hub development.
“We look forward to joining the RHIOJV and working constructively with the other partners to deliver value for all stakeholders.”
The deal valued Red Hill’s stake in the RHIOJV, which contains a total resource of 820Mt at 56.4% iron content, at around six times its $66 million market cap before the deal.
The news sent its price skyrocketing more than 250% to $4.17 on Monday before a dip to $3.85 yesterday, with RHI now trading at a market cap of $230 million.
While MinRes has been looking eagerly at junior assets to grow its production profile, the same is partly true of BHP and Rio Tinto, although for now their business development focus seems to be on other commodities like nickel and lithium.
BHP’s friendly takeover bid for mid-level Canadian nickel explorer Noront Resources last week demonstrated the Big Australian’s growing fervour for leveraging off the work of junior miners to identify and provide a beachhead into new markets and projects.
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Coal is on the nose in these greening times, but that is opening plenty of opportunities for miners looking to take advantage of what are currently solid prices for the energy commodity.
US focused and ASX-listed Allegiance Coal (ASX:AHQ) last week announced a $30 million placement to fund its US$9.3 million purchase of the 220,000tpa BWM Mine near Birmingham, Alabama.
Its plan is to convert what is currently a small, family-owned thermal coal operation into a high quality seaborne met coal export business.
Despite the invidious optics for coal at the moment, Allegiance said demand from investors outstripped its raising target 2.5 times over.
In Australia buyers are currently circling BHP’s coal assets on the east coast in a process understood to be being run by UBS.
At the smaller end of the industry Bowen Coal (ASX:BCB), one of the top risers in the sector in the past week, entered a trading halt Monday ahead of a “material acquisition”.
It was announced last Friday as the preferred bidder by the receivers of the 1.8Mtpa Bluff PCI mine in the central Bowen Basin, whose owners Carabella Resources went into administration in late 2020 as seaborne coal prices plunged and China shut off Australian exports.
Prices are much better now, with hard coking coal FOB Dalrymple Bay Coal Terminal unchanged at US$183.66/t on Monday according to Fastmarkets. Premium hard fetched US$216.20/t.
Chinese prices remain sky high while they rely on domestic and non-Australian supply, with prices cfr Jingtang up $0.54 to US$326.39/t for premium and $1.41 to US$278.62/t for hard coking coal.