Small and mid-size resource company research group Resource Capital Research has completed its quarterly analysis of the Australian iron ore market, noting there are signs of a recovey after spot prices fell in both the December quarter of 2008 and the March quarter this year.
The group puts the improvement down to positive changes in global steel production and steel prices in recent months, as the iron ore price has tended to follow these market developments. On its numbers global refined steel production rose 7.4% between April and May, helping the world steel plate price to a 9% gain in June compared to its May close.
As with most things commodity related the improvement also reflects Chinese buying, the group taking the view the inventory build-up in that country reflects either or both of buying in anticipation of future increases in demand from the steel industry, which is occuring, or a way of ensuring continuity of supply if the contract dispute with Rio Tinto (RIO) continues for a significant period of time.
In terms of the actual market, the group notes the falls in steel prices from the highs of last year, which have been of a magnitude of 22-55% depending on product type, have flowed through to falls in spot and contract iron ore prices this year of as much as 65% at worst from last year's levels.
Contract negotiations have also dragged on as while the major producers, BHP Billiton ((BHP)), Vale of Brazil and Rio Tinto have settled with Japanese, Korean and European buyers at around 32% below 2008 levels, this is still around 20% higher than 2007 contract prices. The Chinese, however, are holding out for cuts of 40%. The contract settlements to date imply prices of US$60 per tonne for fines and US$70 per tonne for lump ore.
Looking forward Resource Capital Research sees scope for contract prices for fines to return to around US$62-$80 per tonne over the next three years, while longer-term it is forecasting a price of US$40 per tonne for fines and US$48 per tonne for lump ore.
As prices have improved in recent months so too have share prices of Australian iron ore plays, the group noting while sector prices have fallen an average of 51% over the past 12 months, they have risen by an average of 52% in the past quarter. (Don't be fooled by the similarity in the numbers - the end result is still for a net loss on balance).
On average share prices are now 56% below their 12-month high but 171% above their 12-month low.
Turning to the stocks under the group's coverage, RCR notes Apollo Minerals ((AON)) will begin drilling its flagship Mt Oscar project this month, with expectations of a resource being outlined sometime in 2010 and the project potentially in production by 2013. The company is in discussions with potential strategic partners in China, the group adds.
Atlas Iron ((AGO)) shipped its first ore last December and the group notes it has plans to boost production from current levels of around one million tonnes per annum to six million tonnes by the end of next year and 12 million tonnes by the end of 20120, its success paving the way for some of the other juniors in the group's view.
For BC Iron ((BCI)) the group notes the 1.5 million tonnes per annum Nullagine project could be producing by the middle of next year, while the company's recent capital raising should help BC Iron fund its share of development costs as part of its joint venture with Fortescue Metals ((FMG)).
With respect to Fortescue, the group notes after shipping 27.3 million tonnes of ore in FY09 the group's target is 50 million tonnes per annum by the second half of 2010 at an operating cost of around US$20 per tonne. Assuming further increases to output lift production to more than 155 million tonnes per annum in coming years, the group sees upside to as much as $8.33 per share.
Brockman Resources ((BRM)) is nearing the release of its pre-feasibility study for its 1.4 billion tonne Marillana deposit, expected this month, with indications of a target for production of 15-25 million tonnes per year from 2012. Sometime in 2010 the group expects the company to update on rail access agreements and provide a definitive feasibility study for the project.
Centaurus Resources ((CUR)) is exploring in Brazil and the group expects an application for a mining lease for the Minas Gerais project sometime in the current quarter, with an aim of producing around 300,000 tonnes per annum by the second half of 2010.
For DMC Mining ((DMM)) Africa is the focus as the Mayoko project in the Congo has currently identified a resources of 33 million tonnes, the group noting there remains scope for this to increase to as much as 500 million tonnes with further exploration work. Production would be in the order of 11 million tonnes per year on current plans.
Iron Road ((IRD)) is expected to provide an initial resource from its Warramboo deposit in South Australia this month, the group noting this is another project with upside to as much as 500 million tonnes. The current project timetable suggests a feasibility study could be completed in the first half of 2010.
A recent placement has added to the cash reserves of Polaris Metals ((POL)) but the company continues to search for a partner for its Yilgarn project. Resource Capital expects a bankable feasibility study on the project by late in the June quarter of next year but current indications are for 3.5-4.5 million tonnes of output annually and operating costs of US$30-35 per tonne.
The Mbalam project in Cameroon is shaping as a 35 million tonnes per year high grade project for Sundance Resources ((SDL)), Resource Capital noting the project has an indicated 20-year mine life at present. While capex costs are high given the distance to ports, the group expects a development decision and a bankable feasibility study in either the current half or the first half of 2010.
Venture Minerals ((VMS)) has released what the group viewed as a solid scoping study for its Mt Lindsay project in Tasmania, with indicated mine life of more than seven years and capex comfortably covered by the group's current cash balance. The group also notes the company has an exploration target at Stanley River, also in Tasmania