Bulk Buys: How iron ore junior Fenix Resources sees a pathway to a long term future

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• Fenix Resources emerged in the iron ore boom of 2021
• It has outlived the other juniors of the era to become a fixture of the ASX iron ore market
• Boss John Welborn says bringing down costs will help it ride the cycles

The story of Fenix Resources (ASX:FEX) is about timing to match a Ricky Ponting cover drive.

The junior long had an impressive asset in its Iron Ridge project near Geraldton, with its simple design, high grades and lump content that ensured a premium product would be developed for sale to Asian markets.

But success came heavily down to its ability, under old managing director Rob Brierley, to seize the moment.

The opening of Iron Ridge in early 2021 coincided with an epic price boom in iron ore as China reopened from its initial run of Covid lockdowns.

As iron ore prices hit US$237/t in May 2021, Fenix was paying off its modest build costs and then some. Other miners who only pressed the go button after the peak would wind up disappointed.

In six months the price would experience its biggest bear drop in history, tumbling US$150 to US$87/t by late October as China rolled out emissions control measures to keep steel production beneath 2020 levels.

Fenix made a $49m profit in its first year, topped out almost $25m in dividends and hedged part of its production to stay in business.

It was one of the quickest sugar hits in ASX history, and one investors were no doubt grateful for.

Two years on chairman John Welborn, former boss of African gold miner Resolute (ASX:RSG), has kept much of that DNA from the early days of the Iron Ridge mine.

But the focus has now passed from those heady ramp up days to the long term.

Iron ore is known as the land of the giants. The big four miners, Rio Tinto (ASX:RIO), Vale, BHP (ASX:BHP) and Fortescue Metals Group (ASX:FMG), control around 80% of the seaborne market.

With costs in the US$20/t range, their ownership of port and rail infrastructure and immense scale has helped them survive multiple mining cycles and prosper in the good times.

Yet history is littered with small iron ore miners who glittered brightly in booms and crumbled or became prey for the big dogs in the down times.

How can a small miner change the narrative today?

Keeping costs down

Fenix has in a way replicated the structure of the majors at a far smaller scale by absorbing its haulage contractor Newhaul, a deal which has seen its costs go from the low $90/t mark to the low $80/t mark between the June quarter of 2022 to the March quarter of 2023.

Its most recent acquisition was a deal to acquire the mothballed Shine and Extension Hill iron ore mines, port sheds and access to rail sidings for the Port of Geraldton from Mt Gibson Iron (ASX:MGX) for $10 million in cash and enough shares to give the Koolan Island mine owner 8.6% of the FEX share register.

Supported by its hedging program — 50,000t a month to the end of the year at a fixed price of $170.10/dmt — at the moment FEX is pulling in healthy margins of around $50/t.

But Welborn told Stockhead on the sidelines of the Noosa Mining Investor Conference this month it will continue to aim lower to future proof against dips in the often volatile iron ore market.

“Long term we’d love to be — look it’s a very ambitious target — we’ve made $50 Australian operating margin,” he said.

“So we’d love to maintain that sort of really big margin per tonne.

“To do that, we’d have to get our C1 cash cost below $50 a tonne and we don’t think that’s impossible if you can boost our production from its current ~1.3Mt level to 5Mt or even 10Mt a year. That’s sort of volume, you get a huge benefit of scale.”

&nsbp;

Ready to Shine?

MGX’s Shine spent just a few months in production in 2021 before a falling iron ore price got the better of its owner.

While the port assets, including a shed so big you could host the Bledisloe Cup in it (perhaps a PR stunt beckons for the former Wallaby), are the big initial drivers of the cost savings Fenix hopes to see from the deal, there are other benefits.

It will also be able to provide services to companies operating in the Mid West, selling everything from iron ore, to lithium and potentially grain.

But the Shine asset’s scale, despite its lower 58% Fe grade, could bolster the long term future for the higher grade Iron Ridge.

“You’re correct that they commissioned that mine, unfortunately for them, during a period where there was a quite significant and quite rapid deterioration in iron ore prices,” Welborn said.

“But that wasn’t the only unfortunate event Mt Gibson had. There was a very unfortunate perfect storm where shipping prices went up significantly as well.

“They were historically around $15 a tonne, and they went well beyond $30. So they almost doubled or more than doubled, all of which directly impacted their forecast margin based on the feasibility studies they’ve done.

“Fuel prices rose, so their haulage costs, which was a third party contracted haulage rate, increased. And there was a standalone operation in what is a modest grade ore body.”

Welborn says Fenix could find a solution for all of those problems.

“Why are we confident we can get Shine going? We have a solution for all of those problems, unlike Mt Gibson, we hedge the iron ore price … over the forecast ramp up of a new operation we would look to do a similar thing and lock in margin,” he said.

“We own our own haulage fleet, so we’re not beholden to third party contract rates and so we can be very confident about what those numbers are going to be, which are, in our case at Iron Ridge, the largest cost component.

“And also obviously shipping prices have come down and we also have a very high grade ore body in Iron Ridge that gives us blending opportunities. So all of the key drivers of Mount Gibson’s decision to put it on care and maintenance we have mitigations for.

“And that’s part of our thinking when we look at when and how we’re going to bring that into production. It’s 15Mt of material, like Iron Ridge it’s a simple mine, and we know we’ve got a strong logistics solution. So it’s a very attractive mining opportunity for us.”

Prices in focus

Of course Fenix, like all miners, needs to take a conservative view on commodity prices to ensure it doesn’t blow the bank and go under when times get tough.

But Welborn noted iron ore had been resilient against a bearish outlook which has suggested China’s property-led steel demand has been weakening.

“I think there’s a structural bearishness in analysis, particularly if you look at the Western Australian State Government, the biggest driver of revenue, or a huge driver of revenue is royalties from iron ore miners, so they need to be bearish because otherwise they blow the budget every single year,” he said.

“The growth in iron ore has been very much driven by real estate in China and Asia. And obviously, we’re seeing a slowdown in real estate and a lot of analysts are forecasting that to flow through into steel demand and therefore iron ore prices.

“However, the recent stimulus packages in China have actually been more around infrastructure and funnily enough metals processing and I think it’s more difficult for the analysts to forecast the related steel demand from the infrastructure stimulus, because everyone’s got so used to it being directly tied to real estate investment.

“So I do think there’s an argument that we’ll see greater steel demand than is forecast and therefore higher iron ore prices. But we’re not counting on that, we are confident that we can be sustainable in a forecasted iron ore price environment. But the upside is, as we’ve shown, we do really well when prices outperform those bearish forecasts.”

The bull case was further strengthened with the Singapore 62% Fe contract lifting to a three month high of US$114.95/t yesterday afternoon.

That came off the back of news China’s Politburo was going to commit to further stimulus to spur its flagging economy and had not included the phrase “housing is for living in, not for speculation” in its statement.

ASX iron ore stocks

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Heatwaves aid energy

Energy prices have been given a bit of support as heatwaves drive up electricity use in the northern hemisphere, as supply concerns out of Russia and Norway ratchet up.

“European gas jumped sharply amid rising risks to Russian supply,” ANZ’s Adam Boyton said.

“Tensions are escalating in Ukraine following a breakdown of the grain deal. Russia still provides Europe with a small amount of gas, that transits through Ukraine.

“Norway is also set for a fresh wave of seasonal maintenance next month. Recent works have been beset by delays.”

Higher gas prices tend to be good for coal, given the arbitrage between the two commodities. It is cheaper to burn coal for energy than it is gas, though high storage levels after a mild winter have helped keep demand in check.

Front month Newcastle thermal coal futures were up slightly to US$143.10/t yesterday, with all the major coal names lifting.

A recent rally for coal stocks comes against the backdrop of a bidding process for BHP’s Daunia and Blackwater coal mines.

They are coking coal assets, but look to be attractive to energy coal companies like Yancoal (ASX:YAL) and Whitehaven (ASX:WHC), which is looking to diversify its asset base from its Hunter Valley thermal mines.

ASX coal stocks

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