Bulk Buys: MinRes’ $3 billion mine approval flags China hunger for our iron ore
A rich-lister’s decision to go ahead with a new $3 billion iron ore development in the Pilbara shows the commodity remains a key attraction for China’s industrial powerhouses, despite weakening signals from its steel sector.
Mineral Resources (ASX:MIN) founder and managing director Chris Ellison waxed lyrical about the bright future for lithium, gas and battery manufacturing after presenting his company’s $400 million profit on Monday.
But the big news was the approval of the 35Mtpa Onslow Iron Project, long regarded as the sleeping giant of iron ore.
Proposed back in the boom times, until MinRes stepped in last year the project was effectively on ice.
But two moves from Ellison, made as iron ore prices rose to record levels above US$200/t, laid the groundwork for its revival.
First MinRes picked up an indirect 15% in the APIJV for a pittance from coal hauler Aurizon. Then it paid $200 million up front (with another $200m to come) to junior Red Hill Iron (ASX:RHI) for its stake in the first stage of the Onslow project, the Red Hill Iron Ore JV.
By committing to fund it via an initial $1.3b loan and getting its partners Baowu, AMCI and POSCO onside, MinRes will claim a further 17% of the project, taking its effective ownership including its stake in the APIJV to 60.3%.
China’s steel complex has, as is often the case, sent mixed messages.
Despite expectations, environmental curbs and Government directives that 2022 output would be lower than 2021, crude steel production recovered to 2.7Mt/day in mid-August according to MySteel.
While blast furnaces are back in business, power hungry electric arc furnace mills have slowed as margins have again been squeezed, with major EAF mill owner Shagang Group dropping procurement prices for scrap steel in response to market pressure.
Iron ore futures on the Singapore exchange also fell precipitously, dropping 4.82% to US$96.90/t, tripping below US$100/t for the first time since July.
At the same time, Ellison thinks the long term outlook for iron ore remains positive.
Despite suffering a big drop in profits on the back of falling iron ore prices, he told analysts and investors he did not see iron ore prices falling below US$80/t.
Onslow, expected to deliver first ore in December 2023, is planned to be resilient enough to weather cycles where prices fall below that point.
MinRes dropped around 3 million high cost tonnes from its production schedule at its Yilgarn iron ore mines last financial year as prices fell, with FOB costs of $85-95/t at Yilgarn and $65-75/t at its Utah Point hub in the Pilbara well above the costs of beefed up majors BHP, Rio Tinto and Fortescue.
At Onslow MinRes has come up with a way to mimic the infrastructure advantage of the majors without the capital cost of building its own railway, running autonomous on privately owned haul roads.
Ellison says costs will be just $32/t FOB, inclusive of MinRes’ mining services margin.
The involvement of Baowu, China’s largest steelmaker, suggests major players in the steel industry there see a big future for the sector and that it can absorb new supply.
“Baowu have given a commitment, they want to market at least 50% of MinRes’ share of the iron ore and they’ve got an option over another 25% of it,” Ellison said.
“I think I’ll most likely do that and I’m more than happy for Baowu to be hauling all our dirt into into China for the next 50 years.”
Longer term, the mine could expand again to 55Mtpa.
Fortescue and MinRes predictably announced large dividend payouts to shareholders this week, even if lower prices in FY22 saw profits and total dividend splashes get a bit drier.
Smaller iron ore players on the other hand have been seriously squeezed by lower prices, with their higher costs prompting them to delay or review production plans that seemed very sound when benchmark 62% Fe prices were above US$160/t earlier this year.
One standout junior though is Fenix Resources (ASX:FEX), which announced a fully franked 5.25c per share dividend on Monday after a ramp up in operations at its Iron Ridge mine drove a $50.7m NPAT and record $249.2m in sales revenue, up 118% on FY21.
Fenix has a couple things going for it, including a hedging policy that means much of its production is sold above prevailing prices, high grade hematite ore body with lump and fines from a resource of 8.3Mt at 64.8% Fe, and the recent purchase of its haulage provider Newhaul, bringing its transport costs in house.
FEX sold 1.34M wet metric tonnes at C1 FOB cash costs of US$62/wmt in FY22, generating a decent margin despite prices falling compared to FY21’s garish highs.
Fenix has $102m cash in hand, and boasts a policy of paying 50-80% of profit to shareholders, with its FY22 payout totalling $28.7m. Not bad for a little guy.
Prices are still ridiculous.
Thermal coal was paying US$427/t on spot Monday, seven times pre-pandemic prices.
Coking coal has narrowed an unusual discount it is seeing to thermal, fetching around US$250/t having fallen to the US$200/t mark around a month ago.
Having hit US$220/t on July 28, Commbank mining analyst Vivek Dhar says the gap narrowed to US$144/t last week.
Premium coking coal, he notes, was trading at a Bradman-esque US$334/t premium back in March when war between Russia and Ukraine first broke out, sending steelmaking coal prices to US$671/t.
Dhar says Europe’s Russian coal ban and switching of mixed met and thermal coal brands to supply power stations had tightened coking coal supplies in recent weeks.
“The recent rebound likely reflects increased demand for Australian coking coal following Europe’s ban on Russian coal imports earlier this month,” he said.
“While Europe has implemented the ban, advanced economies like Japan, South Korea and Taiwan are looking to reduce their exposure to Russian coking coal.
“Russia accounts for ~10% of traded coking coal markets with Europe typically looking to Russia for 55‑60% of their coking coal requirement.
“High thermal coal prices have likely helped too. We’re already seeing semi‑soft coking coal supply reduce as coal miners like Whitehaven look to shift more semi‑soft coking coal into thermal coal blends given the price premium for thermal coal.”