Iron ore stocks are down but the market’s looking up. Is it buying time?
The outlook for Aussie iron ore is looking good with a cut in Chinese production — and a recent stock market sell-down could be a buying opportunity for investors.
The benchmark price of iron ore has edged higher this week — to more than $US66 a tonne — on declining port stocks in China.
UBS analyst Glyn Lawcock says it’s a “very healthy” price and Chinese demand for high quality iron ore is on the rise.
Despite that view, about half of the 100 or so ASX stocks with iron ore projects have lost ground over the past year.
And the six-month view is even more sombre — with only about 30 per cent of iron ore-related stocks ahead over that period.
>> Scroll down for a list of ASX stocks with iron ore exposure, courtesy of leading ASX data provider MakCorp
Woomera Mining (ASX:WML) has witnessed the biggest drop of 91 per cent since the start of 2018, while Reedy Lagoon (ASX:RLC) has slipped over 81 per cent and Indo Mines (AX:IDO) has fallen about 79 per cent.
What’s generating demand
Analysts expect iron ore demand to be driven by improved margins for Chinese steelmakers, high coking coal prices and China’s crackdown on its polluting operations.
“I think it’s pretty clear that the Chinese aren’t going to change their view on the environment any time soon,” Mr Lawcock told Stockhead.
“China is clamping down on dirty domestic mines and a number of those dirty domestic mines are iron ore mines.
“So if you lose domestic supply it forces the Chinese into the international market more and more.”
China’s annual domestic iron ore production has tumbled from over 400 million tonnes to the low 200-million-tonne mark, Mr Lawcock says.
At the same time, the World Steel Association reported this week that China’s crude steel production was up 8.9 per cent in May and global crude steel production was up 6.6 per cent.
“So even if you have no steel production growth, you could actually get iron ore consumption growth in China because they’re cannibalising the domestic market, which is quite polluted,” Mr Lawcock explained.
The Atlas factor
Focus has turned to the iron ore sector with the recent activity surrounding struggling junior producer Atlas Iron (ASX:AGO).
Atlas’ share price has spiked 126 per cent since Mineral Resources (ASX:MIN) announced its all-scrip offer for the company. Over the past 12 months Atlas’ share price is up 230 per cent.
If Atlas iron is swallowed up by larger rivals Hancock Prospecting or Fortescue Metals Group, it will effectively see the exit of one of the few remaining junior pure-play iron ore producers from the market.
This will leave a gap in the small cap iron ore space.
Iron ore producers haven’t had an easy time of it, hence the reason the smaller players are becoming a rare breed.
The price of the steelmaking commodity bombed below $US40 ($54.18) per tonne in late 2015 – a far cry from the heady highs of over $US190 per tonne producers were getting during the boom.
This led to many players cutting production and mothballing operations, while others diversified to stay afloat.
Here’s a list of ASX stocks with exposure to iron ore courtesy of leading ASX data provider MakCorp.
Scroll or swipe for full table. Click headings to sort
While Atlas is still primarily an iron ore play, it did strike a deal in March to export low-cost “DSO” lithium from Pilbara Minerals’ Pilgangoora project in Western Australia to China to help boost its earnings.
DSO lithium requires only simple crushing before it is exported, which keeps costs low.
BCI Minerals (ASX:BCI) was once known as BC Iron and also used to be a pure-play iron ore producer.
However, since the downturn hit, the company has changed its name and turned its focus to salt and potash, which it thinks can be good cash generators.
BCI’s share price has tumbled 20 per cent since the start of this year to 14c, but is up 12 per cent since this time last year.
Perfect timing for new players
There is a new entrant making its way into the junior iron ore space and it probably couldn’t have timed its foray any better.
Emergent Resources, which will eventually be renamed Fenix, is preparing to re-list on the ASX with an $8.5 million market cap.
The company is aiming to position itself as a niche supplier of high-grade products to the steel industry.
Emergent owns the Iron Ridge mine in Western Australia, which already has a resource of 5 million tonnes at 64.1 per cent iron ore.
The benchmark iron ore price is based on 62 per cent iron ore and higher grade ore fetches a much better price.
High grade iron ore of 65 per cent is currently selling for over $US90 per tonne.
Another emerging high-grade producer is Magnetite Mines (ASX:MGT), which is in the process of finalising a merger with Lodestone Equities.
The merger could be a potential gateway to early production for Magnetite with the addition of Lodestone’s Olary project in South Australia, which can potentially produce a concentrate grade of 69.6 per cent iron ore.
The Olary project lies to the east of Magnetite’s larger Razorback deposit.
The merger also gives Magnetite ownership of all the infrastructure being developed by Braemar Infrastructure.
Magnetite’s share price, however, has slipped over 68 per cent since the start of 2018 and 63 per cent over the past 12 months. It closed at just over 1c on Wednesday.
Stockhead is proud to use MakCorp as a provider of great value, accurate and reliable data on ASX-listed mining stocks. For more information head to MakCorp’s website.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.