Ground Breakers: Iron ore above US$100 and Regis defends Tropicana deal
Iron ore charged back above US$100/t overnight, on indications steel mill margins were turning more profitable.
Iron ore futures were still rising this morning even after prices moved north overnight.
The charge in iron ore prices has come off the back of suggestions China could ease monetary policy to support its slowing economy and pressured property market, and that steel mills could pick up after pollution-related policy measures drove the sector down to multi-year production lows in recent months.
Benchmark 62% fines rose US$2.92/t Wednesday to US$102.75/t according to Fastmarkets MB, with premium 65% fines paying US$116.90/t. Discounted 58% product was also US$4.34/t higher at US$76.37/t.
Mineral Resources (ASX:MIN) was up 3.56% while Champion Iron (ASX:CIA) rose 0.97% and Deterra Royalties (ASX:DRR), which receives its revenue from a royalty over BHP’s Mining Area C hub, was up 2.17%.
Commbank analyst Vivek Dhar said steel output restrictions had eased in recent days while steel demand was higher.
“The rise in steel mill margins can be linked to higher steel prices in China,” he said in a note.
“With steel output restrictions showing signs of easing in recent days, a lift in steel demand looks the most likely cause.”
“That’s important given the recent weakness in China’s steel demand, especially in China’s property construction sector (~30% of China’s steel demand). China’s property sector has been weighed down by the financial pressures facing China’s property developers.”
Dhar, who believes iron ore will end the year at US$85/t before averaging US$90/t in 2022, said it remained to be seen what looser credit rules meant for the property sector and cautioned large-scale infrastructure related stimulus measures were unlikely.
“A potential improvement in China’s property sector is consistent with policymakers loosening credit restrictions for local property developers,” he said.
“It’s too early to say though that the worst is over for China’s property construction sector.
“The rise in steel mill margins may indicate a recovery in China’s steel demand, but it’s a space to keep watching closely.
“We think the likelihood is low of a large‑scale infrastructure stimulus package in the short term. Policy goals to limit emissions and inflation run counter to an infrastructure package.
“It’s also unlikely that infrastructure is used in the short term to support economic growth given China is just recovering from a power crisis. China’s infrastructure sector accounts for ~30% of China’s steel demand.”
All the way back in 2018 Capricorn’s board knocked back an 11.4c per share offer (a 93% premium at the time) from Regis, which was looking to expand after several years of growing production from its low cost Duketon operations.
Since then the Karlawinda gold mine owner has welcomed former Regis chairman Mark Clark on board and gone from strength to strength.
Capricorn is just getting started at the ~110,000ozpa Karlawinda and will only report costs for the first time this quarter.
Meanwhile, Regis made a net profit after tax of $146 million and paid a 7c per share dividend in the 2020-21 financial year, and with its first full year of production from its new 30% stake in WA’s massive Tropicana gold mine is on track to become a 500,000ozpa producer.
Over the past 12 months Regis’ shares have almost halved, chopping its market cap from ~$2.7 billion to ~$1.5 billion. At the same time Capricorn’s has risen 74%, going from around $600m to $1.08 billion.
In an address prepared for Regis’ AGM today, the gold miner’s chairman James Mactier acknowledged the week share price performance, linking it to shareholders’ responses to ongoing permitting delays at its McPhillamys gold project in New South Wales and the reaction to its $900 million buy of the minority Tropicana stake from IGO (ASX:IGO).
“It was disappointing in that, despite making considerable progress, we have not yet obtained regulatory approval for the development of McPhillamys and of course, that our share price declined very significantly,” he said.
“Clearly, the general decline in investor sentiment across the gold sector had a significant impact on our share price. However, we also recognise Regis-specific factors exacerbated this decline, including the McPhillamys delays and our acquisition of Tropicana.”
Mactier said Regis still believes the price paid, a significant premium to recent averages per reserve ounce, was fair.
“As for Tropicana, we believe we paid a fair price for an exceptional asset, the accretive value of which to Regis shareholders will become increasingly evident,” he said.
“Tropicana is a large-scale, long-life, low-cost, well-managed, cashflow-positive mine. It is without significant legacy, execution, community or permitting risks and is located in arguably the world’s premier mining jurisdiction.
“Gold mines such as Tropicana are few and far between, very hard to find and rarely for sale.”
“In addition to its stand-alone value, Tropicana adds diversification, mine-life and scale to our existing portfolio of assets which together, provide investors with lower risk exposure to the gold price (which I note, has increased by approximately $300 per ounce since our acquisition).
“Most importantly, we believe Tropicana offers considerable upside through resource conversion and exploration potential, which was highlighted in the exploration update we provided to the market on Monday.”
Mactier added his voice to gold figures who believe “alarming levels of inflation” provide a supportive backdrop for gold to prosper.