Monsters of Rock: Morningstar ups fair value estimates for iron ore players on higher longer term prices

Morningstar ups fair enterprise value for iron ore miners
Court approves IGO’s acquisition of Western Areas
Bellevue gold says it’s on track to produce 200,000oz a year by H2 2023

Morningstar has upped the fair value estimates (FVEs) for iron ore miners off the back of higher midcycle prices, partially offset by higher costs.

FVEs show investors the ‘fair value’ of a company – kind of like knowing the value or a car or getting a house appraised – so you can determine if the price of a stock is high or low compared to its fundamental value.

FVEs are calculated by looking at a company’s financial statements and annual reports, and assessing the management structure, competitive advantage, and corporate governance.

It estimates the future cash flows of the company and adjusts them to today’s dollars.

Based on that research, a value is calculated that estimates the value of the company and what one share of stock should sell for.

Nice FVE uptick for iron ore players

“We raise our fair value estimates for no-moat BHP (ASX:BHP), Rio Tinto (ASX:RIO), Vale, and Anglo American to AUD 38.50, AUD 108, USD 20.50, and GBX 3,350, respectively, up from AUD 36, AUD 101, USD 17.50, and GBX 3,150 previously,” Morningstar analyst Jon Mills said.

“The increases are driven by higher assumed midcycle iron ore prices, partially offset by lower near-term prices and higher unit costs.”

Mills assumes iron ore will average US$120 per tonne from 2022 to 2024, down from USD 148, based on the futures curve.

“However, we raise our assumed midcycle iron ore price to USD 60 per tonne from 2026, up from USD 44,” he said.

“That higher midcycle price is primarily driven by rising costs, restrained supply, and depletion at existing mines, partially offset by higher production from Vale and Simandou coming online.”

The primary determinant of demand is global crude steel production, which Morningstar expects to be around 2.1 billion tonnes in 2026. This represents annual average steel production growth of around 1.5% and China will account for around half.

Whether bear or bull depends on Rio and Vale

While Morningstar says BHP and RIO have substantial resource life that would allow each to materially increase production if desired, Mills thinks material growth is more likely to come via expansion at Vale and/or development of Simandou in Guinea.

“Our analysis suggests midcycle iron ore prices from 2026 are between a bear scenario of USD 50 per tonne and a bull scenario of USD75,” Mills said.

In the bull scenario, Morningstar assumes Rio Tinto’s (ASX:RIO) Simandou mine in Guinea is delayed due to difficulties building the mine and associated infrastructure, and that Vale maintains production discipline despite increasing system capacity to between 400 million and 450 million tonnes in coming years, while demand for iron ore from China remains in strong on continued strong crude steel production.

“In this scenario our assumed midcycle price rises to USD 75 per tonne,” Mills said.

“In our bear scenario, we assume Simandou ramps up earlier while Vale materially increases production closer to system capacity of between 400 million and 450 million tonnes.

“We also assume Chinese crude steel production peaks and starts declining earlier than in our base case, resulting in peak demand for iron ore also occurring earlier.

“In this scenario, our assumed midcycle iron ore price falls to USD 50 per tonne.”

Court approves WSA-IGO acquisition

The Supreme Court of Western Australia has approved scheme of arrangement where a wholly owned subsidiary of IGO Limited (ASX:IGO), IGO Nickel Holdings Pty Ltd, will acquire 100% of the share capital of Western Areas (ASX:WSA).

Western Areas, which has $151.8m in the bank, no debt and spent $38.3m on capex mainly on the new long life Odysseus mine in WA, was able to barter the value of the IGO cash takeover up from $3.36/share to $3.87 after nickel prices rose 70% YTD, squeezing the value out of IGO’s original offer.

The company’s last quarterly showed that, while the nickel price hit US$100,000/t briefly on an epic short squeeze in March before it was quickly nixed by the London Metals Exchange, prices still remain buoyant.

Western Areas enjoyed a roughly one third rise in realised prices from $13.16/lb in the December quarter to $18.44/lb in March against cash costs of $5.52/lb.

The company also hit record monthly revenue of $52 million in March as operating cashflow for the March quarter rose on the prior period from $15.2m to $50.1m on a “robust nickel price environment”.

That came despite maintenance at the Cosmic Boy mill at its Forrestania nickel mine and a decision to develop lower grade zones suddenly made economic by the flying nickel price took production, which pushed down production from 4200t to 3254t.

Western Areas now expects to lodge an office copy of the Court’s orders with the Australian Securities and Investments Commission tomorrow – at which time the Scheme will become legally effective.

If this occurs, the company expects that Western Areas Shares will be suspended from trading on ASX at close of trading on Wednesday, 8 June 2022.

BGL on track to produce 200,000oz a year

Bellevue Gold (ASX:BGL) announced that pre-production costs for its namesake project haven’t taken a hit from rising industry costs, with more than 90% of these expenses either committed or locked in via tenders.

The company says it is firmly on track to be a leading 200,000oz a year gold producer by the second half of next year.

The project is set to boast some of the lowest operating costs among ASX-listed gold producers, with AISC forecast to be in the range of A$1,000-A$1,100/oz over the first five years.

And Bellevue’s outlook has also been further strengthened by a 29% increase in Reserves to 1.34Moz at 6.1g/t gold – underpinning a 10-year mine life.

“This extensive work program, which has included leading independent experts, show the Bellevue Project will be a 200,000oz a year producer with low operating costs and strong cashflow generation in the tier-one location of WA,” MD Steve Parsons said.

“By locking in 90% of our pre-production costs and underpinning our 10-year mine life with 1.34Moz in Reserves, we have significantly de-risked the Project and put us on a path to realising the immense value of this exceptional asset”.

Notably, the project pre-production capital requirement remains fully funded with Bellevue’s existing liquidity of $351 million (as at 31 March 2022) including the undrawn $200 million Macquarie debt facility.