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Bulk Buys: Iron ore miners failing upwards as supply issues support prices
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The ability to fail upwards may well be one of the greatest and most mysterious skills of the corporate world.
And the fallout from Rio Tinto (ASX:RIO) and BHP’s (ASX:BHP) latest quarterly reports could be another sign of that ironic phenomenon in action.
Both underwhelmed with their latest reports. Rio especially after announcing last week it would fall beneath its 325-340Mt guidance range for the third straight year in 2021, unashamedly blaming Covid and the labour market for slowing down projects at its Pilbara iron ore mines.
CEO Jakub Stausholm delivered this feeble attempt at a mea culpa.
Shocker of a quarterly production report from Rio – downgrades across the board.
But as heroic euphemisms go, this one from CEO Jakob Staushom is a cracker:
"…we recognise the opportunity to raise our performance".
— Crankynick (@crankynick) October 14, 2021
BHP’s September Quarter saw its production fall 4% down year on year to 63.3Mt (around 71Mt on a 100% basis) in the three months to September 30.
The upshot of that is positivity in the iron ore spot market, with the January Dalian futures contract recovering morning losses to end the day slightly ahead.
According to Fastmarkets MB 62% fines were fetching US$124.32 per tonne, down US90c, with the market enjoying an unusual level of stability over the past week.
Prices had previously fallen 60% from May highs of around US$237/t to September 21 lows of US$93/t before rebounding.
BHP and Rio Tinto share prices today:
Brazil exports continue to disappoint
While Australian miners disappointed last quarter (FMG is yet to report mind you), Vale must be really testing the resolve of investors who took it at its word that it would flood the seas with its high-grade Brazilian ore.
Vale is yet to recover its production to 2018 levels after the Brumadinho tailings dam tragedy forced it to suspend a number of mining operations in January 2019.
After knocking down its planned 2022 run rate from 400Mtpa to 370Mtpa recently, its shipments have fallen even further behind schedule.
According to Mysteel yesterday, shipments from Oz and South America into China fell 2.4% or 589,000t for the second straight week to 23.5Mt, a two-month low, with Brazilian exports sinking by 1.2Mt week on week to a five-month low of 5.9Mt.
For now those supply issues appear to be giving iron ore prices an additional layer of support to protect against Chinese Government directed steel production cuts and power rationing, which saw Chinese crude steel output to just 73Mt in the month of September, the lowest level in around 2.5 years.
Speaking to Stockhead last week, Fastmarkets index manager Peter Hannah highlighted Brazil’s struggles to ramp up production as a factor going in favour of the Australian producers.
“Brazil is, you know, underwhelming at the moment,” he said at the time.
“Their September shipments I think were below September last year, and still below the levels before the dam collapse.
“So in the longer term, this price crash will probably mean less new supply comes to market.
“And once the market forces themselves reestablish, maybe a few years out, and these sorts of steel production curbs ease, then I think what we’re seeing now this correction now probably sets the stage for slightly better prices for longer into the future.”
ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 WEEK RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| SHH | Shree Minerals Ltd | 0.0115 | 5 | -32 | 28 | -4 | $ 11,695,605.81 |
| AKO | Akora Resources | 0.23 | 2 | -34 | 21 | $ 10,992,125.76 | |
| RLC | Reedy Lagoon Corp. | 0.026 | 4 | 18 | 18 | 100 | $ 13,500,654.15 |
| RHI | Red Hill Iron | 5.03 | 26 | 906 | 14 | 2295 | $ 315,311,056.06 |
| EFE | Eastern Iron | 0.042 | -2 | 275 | 14 | 275 | $ 34,235,095.56 |
| GWR | GWR Group Ltd | 0.16 | 14 | -45 | 10 | -15 | $ 49,959,763.10 |
| PFE | Panteraminerals | 0.33 | -12 | 8 | $ 13,090,000.00 | ||
| HAV | Havilah Resources | 0.205 | -2 | 3 | 8 | 11 | $ 59,724,059.46 |
| PLG | Pearlgullironlimited | 0.15 | -25 | 7 | $ 7,544,030.06 | ||
| LCY | Legacy Iron Ore | 0.015 | 7 | -29 | 7 | 150 | $ 99,273,447.01 |
| FMS | Flinders Mines Ltd | 0.845 | -2 | -36 | 7 | -25 | $ 142,677,047.57 |
| ADY | Admiralty Resources. | 0.016 | -11 | -27 | 7 | -6 | $ 23,464,424.75 |
| MGT | Magnetite Mines | 0.026 | 0 | -64 | 4 | 100 | $ 81,769,366.87 |
| HIO | Hawsons Iron Ltd | 0.083 | -5 | 101 | 2 | 117 | $ 56,331,183.05 |
| MIO | Macarthur Minerals | 0.42 | -18 | -13 | 2 | -41 | $ 59,937,510.03 |
| BCK | Brockman Mining Ltd | 0.044 | -8 | 52 | 2 | 47 | $ 380,448,517.37 |
| FEX | Fenix Resources Ltd | 0.24 | -19 | -16 | 2 | 66 | $ 115,692,410.40 |
| MGU | Magnum Mining & Exp | 0.066 | -8 | -59 | 2 | 22 | $ 32,811,564.32 |
| BHP | BHP Group Limited | 38.52 | -2 | -19 | 1 | 6 | $ 115,620,352,130.86 |
| EQN | Equinoxresources | 0.23 | $ 11,250,000.25 | ||||
| VMS | Venture Minerals | 0.05 | -9 | -21 | 0 | 67 | $ 69,261,786.70 |
| TLM | Talisman Mining | 0.145 | -3 | 4 | 0 | 26 | $ 27,181,949.26 |
| SRN | Surefire Rescs NL | 0.014 | 0 | -48 | 0 | -52 | $ 16,564,656.14 |
| MDX | Mindax Limited | 0.05 | -17 | 1567 | 0 | 1567 | $ 95,246,788.75 |
| ACS | Accent Resources NL | 0.055 | 2 | 38 | 0 | 450 | $ 25,631,500.57 |
| CIA | Champion Iron Ltd | 4.74 | -7 | -25 | 0 | 55 | $ 2,426,096,086.04 |
| MAG | Magmatic Resrce Ltd | 0.099 | -1 | -27 | -1 | -49 | $ 24,939,706.20 |
| GEN | Genmin | 0.19 | -3 | -30 | -3 | $ 55,046,130.75 | |
| DRE | Drednought Resources | 0.038 | -5 | 100 | -3 | 23 | $ 101,947,036.39 |
| FMG | Fortescue Metals Grp | 14.58 | -5 | -30 | -3 | -12 | $ 45,383,942,891.32 |
| RIO | Rio Tinto Limited | 98.98 | 0 | -17 | -3 | 4 | $ 37,659,884,910.30 |
| GRR | Grange Resources. | 0.58 | 15 | 6 | -3 | 137 | $ 665,469,751.35 |
| SRK | Strike Resources | 0.12 | -4 | -41 | -4 | 9 | $ 33,750,000.00 |
| MIN | Mineral Resources. | 42.95 | -11 | 0 | -4 | 70 | $ 8,188,545,148.96 |
| TI1 | Tombador Iron | 0.043 | 8 | -45 | -4 | 26 | $ 46,953,914.20 |
| MGX | Mount Gibson Iron | 0.445 | 5 | -51 | -5 | -36 | $ 544,755,614.85 |
| HAW | Hawthorn Resources | 0.054 | 13 | -11 | -8 | -47 | $ 18,009,843.10 |
| CZR | CZR Resources Ltd | 0.008 | -11 | -38 | -11 | -43 | $ 29,633,747.85 |
| FEL | Fe Limited | 0.036 | -43 | -18 | -12 | 33 | $ 31,000,045.14 |
| JNO | Juno | 0.115 | -32 | -15 | $ 15,600,670.12 | ||
| IRD | Iron Road Ltd | 0.195 | 3 | -25 | -17 | 16 | $ 154,945,107.33 |
China could make those ambitious steel cuts after all
On the demand side, China could well be on track to meet its target of keeping steel production to 2020 levels (around 1.065Bt) after producing just 2.46Mt a day in the month of September.
According to Commbank analyst Vivek Dhar, the nation’s steel factories need to keep production to 2.69Mt/day to avoid surpassing 2020 output.
“While reducing steel output to reduce emissions has been on the policy table since the end of last year, we have seen the nationwide policy gain more support since mid-2021,” he said.
“China’s steel sector accounts for ~15% of China’s carbon emissions and will have to play a significant role to achieve China’s net zero emissions ambition by 2060.
“The goal to keep China’s steel output at 2020 levels this year is now looking more believable. China’s daily crude steel output just needs to average 2.69Mt/day in Q4 2021 to meet policy objectives.
“That’s above the 2.46Mt/day recorded last month.”
A billion tonne steel market would still make 2021 one of China’s most productive, albeit one of two halves.
Steel profits are being impacted by extremely high coking coal prices that are more than five times the iron price in parts of China, but still remain strong.
Coal miners turn to profit
By now everyone is familiar with the rocket under thermal coal, which could spiral even further out of control with China’s thermal coal futures storming in the direction of 2000 Yuan today, more than double its target price levels.
China doesn’t want Australian coal, but thermal coal and a variety of coking coal types from Down Under are still getting a serious bid from other energy starved economies.
Yancoal (ASX:YAL), ironically owned by China’s state-owned Yanzhou Coal but unable to ship to China, says it received more for its 10.4Mt of coal exports in the third quarter compared to just two quarters earlier.
The rise in prices has been so stark they increased by 53% in one quarter to US$155/t. Yancoal’s realised sale price averaged just US$101/t in the June Quarter and US$70/t in the March Quarter.
Yancoal’s prices aren’t even close to the top of the market as well. It sells a lot of API5 5500kCal product, a lower energy coal that is receiving a growing discount to the GlobalCOAL 6000kCal Newcastle index, which was fetching around US$240/t yesterday.
“Considering our realised price lags index prices due to contract structures, and the index prices were still rising at the end of the period, the outlook for the realised price in the final quarter is positive,” the company said.
High coal prices expected to continue
According to Yancoal, there has not been a major supply increase either in China or from overseas in response to booming prices, something that could see strong pricing persist across 2022.
“Price indices continue to appreciate on the back of increased global energy demand as the economic recovery continues and the northern hemisphere winter approaches,” Yancoal said.
“Exports might gradually increase with the disruptions caused by rains in Australia and Indonesia and logistic
concerns in Russia and South Africa passing. Appreciating steel prices and conditions in the premium thermal coal market support the semi-soft coking coal index.
“Yancoal optimises its production to maximise sales between the different markets and seeks diversification of its customer base.
“Yancoal has sufficient infrastructure capacity throughout 2021 to facilitate the year’s planned sales. During the remainder of 2021 and into 2022, we expect a continued recovery of global economic conditions and the associated demand for electricity generation to support thermal coal indices.”
The company is looking to expand its Moolarben open cut mine over the next 18 months from 14Mtpa to 16Mtpa after receiving approval from the New South Wales Government, while it also studies an underground expansion.
While coal, prices aside, may be on the nose during the push to transition to zero carbon energy sources, the current environment is ripe for expansions, with a number of mines or expansions approved by State and Federal Governments in recent months and Yancoal stating it is open to both organic and corporate growth options.
“The Company is open to expanding or extending the operational profile of its existing assets with organic projects, like those identified at Moolarben,” it said.
“It would also consider acquiring additional coal assets or diversifying into other minerals, energy or renewable energy projects should suitable opportunities arise.”
Yancoal share price today:
Remarkable coal turnaround for Terracom
ASX coal stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | 1 WEEK RETURN % | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.012 | 9 | -8 | -33 | -29 | $ 15,794,888.01 |
| CKA | Cokal Ltd | 0.185 | 6 | 9 | 185 | 189 | $ 173,360,227.91 |
| NCZ | New Century Resource | 0.155 | 0 | -6 | -18 | 4 | $ 187,538,847.13 |
| BCB | Bowen Coal Limited | 0.195 | 3 | 26 | 189 | 233 | $ 248,496,892.21 |
| LNY | Laneway Res Ltd | 0.005 | 0 | 0 | -17 | -38 | $ 19,520,329.67 |
| PDZ | Prairie Mining Ltd | 0.275 | -7 | -14 | 6 | 22 | $ 62,465,874.03 |
| AKM | Aspire Mining Ltd | 0.11 | 10 | 31 | 21 | 47 | $ 53,301,883.43 |
| PAK | Pacific American Hld | 0.018 | 0 | 0 | -12 | -12 | $ 5,734,528.20 |
| AHQ | Allegiance Coal Ltd | 0.58 | -11 | -2 | -7 | 68 | $ 190,701,705.52 |
| YAL | Yancoal Aust Ltd | 3.7 | -10 | 48 | 62 | 93 | $ 4,753,581,973.20 |
| NHC | New Hope Corporation | 2.525 | -5 | 17 | 82 | 113 | $ 2,080,892,705.00 |
| TIG | Tigers Realm Coal | 0.029 | -3 | 93 | 263 | 110 | $ 352,800,963.94 |
| SMR | Stanmore Resources | 1.19 | 5 | 32 | 53 | 65 | $ 316,375,418.97 |
| WHC | Whitehaven Coal | 3.35 | -2 | 16 | 125 | 228 | $ 3,428,378,850.24 |
| BRL | Bathurst Res Ltd. | 0.89 | -1 | 5 | 117 | 134 | $ 153,856,460.70 |
| CRN | Coronado Global Res | 1.52 | -6 | 13 | 88 | 95 | $ 2,506,298,326.35 |
| JAL | Jameson Resources | 0.085 | 0 | 6 | -13 | -29 | $ 25,783,210.65 |
| TER | Terracom Ltd | 0.2475 | 50 | 55 | 161 | 65 | $ 154,489,564.15 |
| ATU | Atrum Coal Ltd | 0.05 | 2 | 35 | -12 | -82 | $ 34,386,916.80 |
| MCM | Mc Mining Ltd | 0.125 | 0 | 0 | -4 | 14 | $ 19,302,444.38 |
Yancoal is not the only Australian coal miner enjoying rare air with the recovery and then some in coal prices post-pandemic.
This week Blair Athol owner Terracom (ASX:TER), which has spent much of the year delaying debt repayments as it looked to secure a new finance facility, reported a remarkable turnaround.
Its September coal sales from the Queensland coal mine generated $17.2m in EBITDA at a margin of $101/t, more than four times the $24/t earnings margin it returned in the June Quarter.
It expects to receive a cash margin of $140 on each of the 575,000t it sells in the December Quarter, which on simple maths equates to earnings of more than $80 million.
That is a handy payday for Terracom, especially given coal miners are finding it harder to find financial support these days (something that has prompted Nationals Resources Minister Keith Pitt’s ludicrous $250 billion fund of last resort gambit).
It seems to be even harder in Canada, where support for coal miners is waning from government too.
Coking coal hopeful Montem Resources (ASX:MR1) read the tea leaves this week. It owns the Tent Mountain project, not far from Gina Rinehart’s Riversdale Resources’ Grassy Mountain coal mine in the Rockies.
Gina’s mine was smacked down by environmental authorities in June, painting a bleak outlook for project’s like Tent Mountain, which as of Monday is a coal mine no more.
Montem has done a full 180 and says Tent Mountain is now a mixed wind, solar, hydro and green hydrogen renewable energy project.
