Bulk Buys: Iron ore junior Fenix takes a page out of the majors’ book with haulage deal
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Iron ore prices have returned to levels not seen since late December, a situation that will be watched closely by juniors who hit the pause button in the second half of last year as prices swung from record highs to below US$100/t.
On Monday iron ore prices fell to around US$111/t, down from US$146/t just two weeks ago, as Covid cases and financial difficulties for steelmakers in China hit demand.
Those that survive when prices drop tend to be companies with command of their cost base and logistics network.
Take the Pilbara majors for example, who are well-shielded from the iron ore cycle due to their low cash cost base of ~US$20/t.
Mid West junior Fenix Resources (ASX:FEX) may be far smaller in scale, compared to Rio’s ~320Mtpa network of Pilbara mines. Its Iron Ridge mine ships around 1.25Mt from Geraldton port a year.
But Fenix has taken a massive step to resembling some of those mining giants, by yesterday announcing plans to buy the other 50% of the Fenix-Newhaul joint venture from WA entrepreneur Craig Mitchell.
It will give Fenix total control of 25 quad road trains which run the 490km route from Iron Ridge to the port of Geraldton.
Most crucially it will take Fenix’s costs down $10 to just $70/wmt, helping the company lower its cost base at a time when inflation is putting pressure on others.
With Fenix having locked in a sizeable portion of sales from October 2022 to June 2023 in what are now very in-the-money hedges of $180.65/t at a rate of 35,000t a month, the deal should substantially improve its ability to weather a potential decline in benchmark prices.
“The largest cost component of our operations is haulage, so the ability to to own and control 100% of those cash flows is crucial,” Fenix chairman John Welborn said.
“And we’re now targeting $70 a tonne FOB C1 cash costs.
“When I joined the company, they were up above $90/t and that is a significant opportunity. So while we’ve been very effective in hedging the commodity price, the best hedge for any producer is to control and reduce your costs and that’s the fundamental driver of today’s transaction.”
Fenix, which benefits from premiums attached to the high grade and lump content of the Iron Ridge deposit, generated a $49 million profit in FY21 on just 501,000t of sales, powering a 5.25c a share maiden dividend.
While prices have been lower this year, Fenix still generated $33 million in net operating cash flow in the March quarter with $85.6m in the bank and no debt.
All up the deal will cost $7.5 million in cash with an additional 30 million shares issued to Mitchell, making him Fenix’s largest shareholder, with up to 60 million shares to be issued equally if Fenix crosses three performance milestones in the future of shipping 3, 6 and 10Mt of ore from Iron Ridge.
But Welborn says the deal will pay for itself, with cost reductions of around $12.5 million a year.
“If you think about it from a C1 cash cost, we’ve acquired a cost saving of $10. So at our current run rate of 1.25 million tonnes a year, that’s a C1 cash cost saving of $12.5 million, which we bought for $7.5 million cash and 30 million shares,” he said.
“I think that’s a cracking deal. But importantly … if all Fenix ever does is haul the existing reserve of Iron Ridge to the port of Geraldton, the terms that I’ve just described are immediately value accretive to Fenix shareholders, both in terms of earnings per share – so the share that you currently own – and in terms of the available cash flow for dividends per share.”
Ten million tonnes would go beyond the scope of the current Iron Ridge reserve, but Welborn says the deal will support its efforts to both extend its iron ore production and diversify into other minerals on the sizeable tenement package it boasts in WA’s Mid West.
Welborn, renowned for his previous role at the helm of West African gold miner Resolute (ASX:RSG), said acquiring 100% of the JV gave Fenix the same strength as an integrated iron ore play as the majors.
Along with the haulage fleet, Fenix will pick up a raft of infrastructure including bulk export facilities at the Port of Geraldton.
“If you look at a volatile commodity, any commodity, but particularly iron ore, there will be periods of time where we produce during lower iron ore prices,” Welborn said.
“Having control both in terms of those benefits of cost and flexibility allows us to continue where others won’t. And it’s the strength of big players like Fortescue, Rio and BHP and it’s now a strength of Fenix.
“The growth angle is we effectively own a railway that can move. It’s like a snake, it’s a haulage fleet that is currently very effective for Iron Ridge, but it can be effective for other things, particularly in the Mid West and that’s exciting.”
Steel prices have been falling, erasing margins for steelmakers who are shifting into maintenance mode to stem losses.
SHFE Rebar futures for October delivery have fallen almost US$150 from US$771/t on April 6 to US$625/t yesterday. Property sales were up in May, but sentiment has been hit by the stubborn return of measures from Beijing to control Covid-19.
With coking coal prices stubbornly high, though dropping in recent days, blast furnaces are struggling to find the extraordinary margins they did during last year’s iron ore and steel boom.
According to Chinese consultancy MySteel as many as 10 blast furnaces around Tangshan, a major steel hub, are heading into maintenance to preserve profits, raising the prospect that Chinese steel output will fall from May’s year-long high of 96.6Mt.
Singapore 62% Fe futures did post a comeback yesterday after an 8% fall to start the week, lifting 3.25% to US$114.55/t.
Fellow iron ore small cap Strike Resources (ASX:SRK) says it plans to have its first shipment of iron ore on the water by the end of July.
A Multi-Users Access and Licence Agreement with the Pilbara Ports Authority has been executed for the export of 200,000t of iron ore per financial year.
Around 55,000t of lump is now set for export by Strike out of Port Hedland’s Utah Point facility, following a successful visit by the PPA to the Paulsens East mine site in May 2022.
Strike plans to begin hauling Paulsens East Lump DSO into its allocated stockpile bunker at Utah Point next month.
The company is in ongoing discussions with its marketing agent and project finance provider, Good Importing International (GII), about securing a sales contract with a Chinese steel mill customer for its maiden export shipments.
The outlook is pretty good given the nature of the Paulsens East ore. It is a largely lump deposit, a type of iron ore that attracts premium pricing because it does not need to be sintered before going into a blast furnace.
At the bigger end of town Rio Tinto (ASX:RIO) finally opened its Gudai-Darri mine in the Pilbara yesterday in a ceremony attended by WA Mines Minister Bill Johnston and traditional owners.
The 43Mtpa mine is the first of a number of replacement projects Rio needs to carry out to maintain and grow its ~320Mtpa Pilbara iron ore business over the next decade, but has come in several months late, and at a cost of US$3.1 billion is around US$500 million over budget.
Rio’s Simon Trott touted the benefits of the mine for the local Banjima and Yindjibarndi people, the first new Rio mine to open since the destruction of Juukan Gorge in 2020.
It is also heavily automated, with plans to supply at least a third of the mine’s power with a 34MW solar farm.
“Gudai-Darri represents a step-change in the deployment of automation and technology within our iron ore business and a fantastic demonstration of the talent, ingenuity and capability that exists in Western Australia, a region which is now known globally for its technical excellence and innovation,” Trott said.
“Gudai-Darri’s combination of data and analytics, machine learning and automation, will make this mine safer and more productive.
“Gudai-Darri is our first greenfield mine in the Pilbara in more than a decade and a multi-billion-dollar investment in the State of Western Australia that will operate for decades to come.”
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Australia is no stranger to royalty disputes, and the crosshairs of the Palaszczuk Queensland Government and treasurer Cameron Dick have fallen squarely on their state’s hyper-profitable coal miners.
Producers in the Sunshine State are swimming in rivers of cash right now on account of the ridiculous prices steelmakers and utilities are paying for met and thermal coal respectively.
According to Fastmarkets MB, premium hard coking coal from Dalrymple Bay Coal Terminal was fetching US$376.81/t, the equivalent of $540.06/t in Australian dollars and many multiples of the average coking coal miner’s cost base.
PCI, which normally trades at a discount, is also elevated right now due to Russia’s outsized role in supplying that grade of coal, while thermal coal is trading at around US$390/t.
Little surprise the Queensland Government wants more of the pie. Its royalty regime is staged according to different price points, with miners until now charged a top rate of 15% when prices are above $150/t.
You can add three new tiers on top of that of 20% for each dollar above $175/t, 30% above $225/t and 40% above $300/t.
That announcement late in the trading day yesterday knocked a few miners for six, with Bowen Coal (ASX:BCB) sliding by 40% after also announcing a potentially dilutive $190 million financing package for its Burton mine, Stanmore Coal (ASX:SMR) falling almost 10% and Coronado (ASX:CRN) down 7%.
Dick says the additional payments, which will include mines owned by global giants like BHP, Glencore and Anglo American, will raise $1.2b a year over the next four years to capture elevated coal prices.
Miners, obviously, say it will eat into profits and be a job killer. It has generated particular furore with much of Queensland’s unexpected $1.9 billion surplus driven by royalties from higher coal and gas prices along with a buoyant property market.
“This tax grab is short-sighted and counterproductive over the long term and has the potential to scare off investors in all commodities,” Minerals Council of Australia CEO Tania Constable said.
“It will not only impact thousands of direct mining jobs but also thousands of small businesses and many communities that support mining.
“Mining investment and jobs should not be put at risk through any move to increase the already high tax burden on the industry.
“Mining operations are the backbone of many regional Queensland towns, providing employment, opportunity and a sense of community.”
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