Showers of cash from the big boys of iron ore over the next few weeks will increase investor interest among smaller players in Australia’s most profitable mining industry.
BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals (ASX: FMG) are expected to unleash monster dividend payments when they report half and full year profit results inflated by record prices for the steel-making material.
With this positive news for shareholders in the leading producers of a mineral which refuses to retreat below US$200 a tonne (despite repeated forecasts of a fall), there will also be a flow-on effect as investors hunt for the next crop of winners.
There is a risk for late arrivals at the iron ore party if prices do fall after a three-year boom, but the stocks most at risk are the existing producers, whereas small producers and explorers have not seen their shares over-inflated by yield hunters.
But there is also an upside risk that the price of iron ore will remain elevated for longer than it has in earlier cycles thanks to the unique features of strong global economic growth in the wake of the COVID-19 slowdown and continuing shortfall in supply, especially from Brazil.
Credit Suisse, which had forecast a fall in the benchmark price for high-grade ore (62% iron content) to US$149/t, last week lifted its price prediction for the rest of the year to US$179/t because steel demand, especially in China, continues to exceed expectations.
“Into 2022, we believe the global iron ore market will remain reasonably tight and upgrade our forecasts to US$179/t from US$149/t this year and to US$144/t from US$120/t next year,” the investment bank said in a note headlined “Still going strong into 2022”.
Smaller iron ore plays on the sidelines
The challenge for investors with an interest in iron ore is that news flow from the sector is dominated by the major producers leaving the emerging players on the sidelines despite several having solid stories to tell, such as:
Fenix Resources (ASX: FEX) may be small but has a significant advantage over most other iron ore producers.
Fenix produces high grade ore which attracts a premium above the already inflated benchmark price. A glimpse of what grade means in iron ore was contained in Fenix’s June quarter production report released earlier this week in which the company said it shipped 281,000 tonnes of ore, at an operating margin of A$127 a tonne.
When added to Fenix’s first shipments earlier this year, the June quarter exports from its Iron Ridge mine in the Mid-West of WA, mean the business has sold 500,600t of 62.5% ore in four-and-a-half months to generate a handy $66 million in cash.
Though it has a modest resource of just 10.5Mt of ore, Iron Ridge will have a short but profitable life with its cash funding work on expansion options such as the Ulysses deposit and Iron Ridge Extended.
A strong balance sheet means Fenix’s board is already talking about capital management, code for a share buyback, which helps explain why the company’s share price has moved up sharply over the past six weeks, adding $0.13 (46%) to $0.41.
Red Hill Iron
Red Hill Iron (ASX: RHI) has been on the sidelines so long that few investors have heard of it, but it is one of the best-connected small explorers on the ASX, with its foot on a slice of a potentially world class iron ore development.
The asset plum in Red Hill is part ownership of the Pannawonica Iron Ore Project located in the heart of WA’s Pilbara region with Rio as a neighbour.
Along with the valuable landholdings, Red Hill has impressive partners, including AMCI (American Metals & Coal) and China’s Boasteel.
A number of studies have been completed over the past decade into ways of developing part of the extensive resource base with a fresh attempt currently underway which helps explain why the thinly traded stocks has risen quickly since the start of the year, up $0.83 (307%) to $1.10, valuing the company at $65 million.
Back in 2008, during the last iron ore boom, Red Hill was a mini star, hitting an all-time share price high of $6.58, before a long slide down to $0.12 early last year.
It’s stretching the point to describe CZR Resources (ASX: CZR) as the rebirth of the once-famous Atlas Iron, though, it’s easy to see why that description could be applied to a stock planning a series of small iron ore mines with the former chief executive of Atlas, David Flanagan, the chairman.
For newcomers to the iron ore patch, Atlas was a star in the last boom and an early mover in developing small and largely overlooked orebodies which were solidly profitable in periods of high ore prices.
The starting point for Atlas was the Pardoo mine near BHP’s mothballed Goldsworthy operations with other mines following, until it came to an end when the ore price fell, as did Atlas which was consumed by Gina Rinehart’s Hancock Mining group.
Flanagan’s return is with a plan for CZR to start a small mine on an outcrop called the Robe Mesa in the West Pilbara, potentially exporting through the port of Onslow. There are other assets in the company, all joint ventures with WA’s leading (and richest) prospector, Mark Creasy.
A truly modest stock market performer, CZR has slipped from $0.02 to $0.011 since the start of the year but a recent $7 million capital raising will keep the business ticking over as Flanagan and Creasy kick exploration along.
Long-standing plans by Macarthur Minerals (ASX: MIO) to develop the Moonshine magnetite project near Lake Giles in central WA have been frustrated for years by its remote location and the need to invest heavily in processing to produce a high-value iron ore concentrate.
Moonshine remains a possibility in the future, but the immediate plan is to get moving quickly on a small direct shipping project (no processing) based on the higher-grade Ularring hematite deposits.
A series of recent developments including an application for additional land for processing equipment, and rail haulage deal with Pacific National to deliver up to 400,000t of material a year to the port of Esperance.
Those moves have rekindled interest in the stock which has risen by $0.10 (25%) to $0.50 over the past three weeks.
Successful crushing trials on drill cores taken from Akora Resources’ (ASX: AKO) Bekisopa iron ore project on the Indian Ocean Island of Madagascar has raised interest in the company, which plans to develop a mine producing high grade steel mill feedstock.
What the trials demonstrated is that Bekisopa material only needs to be reduced to 3mm in size to deliver a benchmark 62% iron product, while crushing to 2mm produces a 64% iron product.
Akora said the 2mm sized material would form the basis of a resource estimate which it is working on.
The stock is yet to catch the eye of most investors, though Madagascar is the home of several big mines and outcropping features at Bekisopa assaying up to 66% iron make it a prime target for future developments.
On the market, lightly traded Akora is sitting at around $0.26, valuing the business at an untaxing $12 million.