Iron ore’s return to form a boon for CuFe, the thinking man’s miner

Iron ore has started off 2022 with an unexpected, although familiar bang ( it sounds a lot like a boom) which has brought the sun back to the agile end of the industry.

Benchmark prices soared above US$128/t overnight as heavy rains in Brazil compounded Vale’s already stifled production.

That’s quite a turnaround

It’s hard to believe and there’d be a few analysts pinching themselves right now, considering benchmark fines crashed well over 62% to US$87/t in November last year.

Demand in China and southeast Asia is on the up as well, and Australian producers like CuFe Ltd (ASX:CUF) are poised to deliver in response to rising prices.

This morning CuFe restarted at the JWD iron ore deposit in WA’s Mid West after trimming working capital requirements during the steep dip in iron ore prices.

Along with a well-managed hedging regime, and a top shelf offtake and financing deal with global mining and trading giant Glencore, CuFe’s business model – and its 60% owned JWD iron ore mine – are in the box seat to benefit.

Prices in the roaring (1)20s and mates freight rates

Iron ore is proving tenacious to say the least.

Prices are roaring back way out ahead of expectations, lifting to the high US$120s from year- long lows of US$87/t only a few months ago.

On top of that the lump premium has also rebounded from 5.8c per dry metric tonne unit for September to 20.3c/dmtu for December with the February forward price approaching 30c/dmtu, adding another US$18-19/t to the benchmark 62% fines price.

And the triple whammy for CuFe is the reduction in freight rates from Geraldton Port by about 30%, which will lift the effective price received by the company for its exports.

Hedges offer support, upside… and millions in the right hands

CuFe is one of a number of the smaller, nimble iron ore miners using hedges to their advantage in times of higher prices.

The JV made a total and realized gain of almost US$6 million on its hedge positions for just the 2021 December quarter, and the experienced team have set their positions for the March quarter.

Check it out (some math required)

For February 2022 the hedge position will set a price of US$110-139/t for 25,000dmt of iron ore, with a zero cost collar of US$110-139/t for 25,000dmt and 62% swap at US$128/t on a further 25,000dmt for March.

These will provide a floor price that covers costs and offers upside on increases in iron ore prices.

“It’s encouraging to see the rebound in iron ore price, assisted by a reduction in sea freight rates,” CuFe executive chairman Tony Sage said.

Sage cash management

“We’ve focused on cost and cashflow management over the last quarter while prices have been weaker and start this quarter in a solid position with the mine fully operational and poised to benefit from the stronger prices expected in coming months.

“We have taken advantage of the improved market conditions and entered some further hedges which help to manage our price risk exposure while maintaining upside participation. We will set further positions as the market allows.”

Offtake financing and sales

CuFe has also made headway on repaying its US$7.5m finance facility with Glencore, with US$5m repaid and the remaining balance to be repaid from its next two shipments.

The agreement has been restructured to provide further flexibility and manage working capital, allowing further drawdowns of US$3m against stock held at port.

The next shipment will be loaded in late January for delivery to a new customer in south east Asia, containing cargo from both the JWD mine and CuFe’s JV partner GWR Group’s recently restarted C4 mine.

Material is already stored at the shed in Geraldton Port with building of the next shipment now underway.

This article was developed in collaboration with CuFe Ltd, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.