By Angus Whitley Nov 20, 2014
Bloomberg
Today’s plunge in iron ore is creating tomorrow’s acquisition targets.
With prices at a five-year low, only a handful of companies worldwide can make money selling iron ore, according to UBS AG. Some Chinese mines have closed, while Western Desert Resources Ltd. (WDR) and London Mining Plc have already failed. Pessimistic analysts expect the commodity to slide at least a further 14 percent before the end of 2015 as a supply glut continues.
Among the most vulnerable are Western Australia’s Atlas Iron Ltd. (AGO), BC Iron Ltd. and Gindalbie Metals Ltd. (GBG), according to Fat Prophets Pty. All three -- valued yesterday at less than $200 million after dropping 75 percent or more this year -- are struggling with production costs that are too high for the current market. Private funds such as X2 Resources, which has raised as much as $3.75 billion from investors, may be able to pick up bargains before an iron-ore rebound makes the assets viable, said Ernst & Young.
“The smaller miners in both China and Australia could be the collateral damage,” said Freya Beamish, a Hong Kong-based economist at Lombard Street Research Ltd. “Iron ore prices are on a structural downturn that could play out over several years.”
In Play
The price slide has put even the biggest producers in play. Glencore Plc in July approached Rio Tinto Group with a deal that would have created the world’s largest mining company. Rio rejected the proposal the following month.
Iron ore has fallen 48 percent this year, partly on concern China’s economic slowdown will weaken demand for the steelmaking material. At the same time, BHP Billiton Ltd., Rio and Vale SA have increased production to bolster their market shares, creating a glut and preventing a price rebound any time soon.
The commodity, approaching $70 a ton yesterday, will fall to less than $60 in the third quarter of 2015, Citigroup Inc. said in a Nov. 11 report. Only BHP and Rio, the world’s two largest mining companies, and Pretoria-based Kumba Iron Ore Ltd. (KIO), controlled by Anglo American Plc, produce profitably at that price, UBS analysts said in a Sept. 12 report.
“For those in the high-cost area, it’s a case of survival,” Mike Elliott, Sydney-based global leader for metals and mining at Ernst & Young, said by phone. “If you’re only ever going to make money at the peak of a commodity price cycle, then you may call it quits.”
Distressed Assets
Atlas Iron jumped 4.9 percent to 21.5 Australian cents at the close in Sydney. BC Iron shares lost 4.4 percent to 55 cents. Gindalbie fell 4 percent to 2.4 cents.
A representative for BC Iron had no comment on the company’s break-even price for iron ore or the prospects of a takeover. A representative for Atlas Iron and Gindalbie didn’t return a call seeking comment. All three companies are based in Perth.
London Mining, valued at more than $800 million in 2011, went into administration in October. Just hours before the company’s Marampa Mine in Sierra Leone was set to close, it was bought by Timis Corp., the administrators said on Nov. 3. Credit also dried up in September for Western Desert, which operates the Roper Bar project in Australia’s Northern Territory. Receivers have started to look for potential buyers.
It’s not only tumbling prices that are threatening smaller producers. Companies unable to recover their production costs also find it harder to obtain financing, while project writedowns become more likely, Greg Smith, head of research at Sydney-based Fat Prophets, said by phone.
“There are going to be plenty of assets around or moth-balled operations, if it gets to that,” said Smith.
M&A, Activism
Some miners that are close to breaking even at the current iron ore price might be able withstand the commodity’s slump by halting production until the market picks up, said Ernst & Young’s Elliott. Those that can’t may also be targets, he said.
Funds such as London-based X2 Resources, co-founded by former Xstrata Plc Chief Executive Officer Mick Davis, are logical buyers, according to Elliott. Some funds can wait years before profiting from an investment and may be able to buy the assets “relatively cheaply,” he said.
Resources companies sitting on millions of tons of reserves, mining licenses and other assets may also appeal to activist investors who could push for changes to boost returns. For instance, a breakup of Arrium Ltd., the iron ore producer that’s fallen 83 percent this year, might unlock value in the company’s unit that makes rail wheels and metal balls, Morningstar Inc. said last month.
Waiting Game
Shares of Atlas Iron, which digs for iron ore in Australia’s Pilbara region, have tumbled 82 percent this year. That’s even after the company cut capital expenditure and raised cost-saving targets. BC Iron (BCI) has dropped 89 percent and Gindalbie has plunged 75 percent.
According to UBS estimates, Gindalbie started losing money when iron ore fell below $98 a ton, while Atlas and BC Iron became unprofitable when the price dropped through about $80.
The stock collapses reflect doubts the companies will ride out iron ore’s price slump, said Shannon Rivkin, a director at Rivkin Securities Pty in Sydney.
“It’s guaranteed that we’ll see a lot more companies go out of business,” Rivkin said by phone. “There will be buyers but they’re going to have deeper pockets and longer timeframes. Iron ore prices are not going to be this low forever.”
Bloomberg
Today’s plunge in iron ore is creating tomorrow’s acquisition targets.
With prices at a five-year low, only a handful of companies worldwide can make money selling iron ore, according to UBS AG. Some Chinese mines have closed, while Western Desert Resources Ltd. (WDR) and London Mining Plc have already failed. Pessimistic analysts expect the commodity to slide at least a further 14 percent before the end of 2015 as a supply glut continues.
Among the most vulnerable are Western Australia’s Atlas Iron Ltd. (AGO), BC Iron Ltd. and Gindalbie Metals Ltd. (GBG), according to Fat Prophets Pty. All three -- valued yesterday at less than $200 million after dropping 75 percent or more this year -- are struggling with production costs that are too high for the current market. Private funds such as X2 Resources, which has raised as much as $3.75 billion from investors, may be able to pick up bargains before an iron-ore rebound makes the assets viable, said Ernst & Young.
“The smaller miners in both China and Australia could be the collateral damage,” said Freya Beamish, a Hong Kong-based economist at Lombard Street Research Ltd. “Iron ore prices are on a structural downturn that could play out over several years.”
In Play
The price slide has put even the biggest producers in play. Glencore Plc in July approached Rio Tinto Group with a deal that would have created the world’s largest mining company. Rio rejected the proposal the following month.
Iron ore has fallen 48 percent this year, partly on concern China’s economic slowdown will weaken demand for the steelmaking material. At the same time, BHP Billiton Ltd., Rio and Vale SA have increased production to bolster their market shares, creating a glut and preventing a price rebound any time soon.
The commodity, approaching $70 a ton yesterday, will fall to less than $60 in the third quarter of 2015, Citigroup Inc. said in a Nov. 11 report. Only BHP and Rio, the world’s two largest mining companies, and Pretoria-based Kumba Iron Ore Ltd. (KIO), controlled by Anglo American Plc, produce profitably at that price, UBS analysts said in a Sept. 12 report.
“For those in the high-cost area, it’s a case of survival,” Mike Elliott, Sydney-based global leader for metals and mining at Ernst & Young, said by phone. “If you’re only ever going to make money at the peak of a commodity price cycle, then you may call it quits.”
Distressed Assets
Atlas Iron jumped 4.9 percent to 21.5 Australian cents at the close in Sydney. BC Iron shares lost 4.4 percent to 55 cents. Gindalbie fell 4 percent to 2.4 cents.
A representative for BC Iron had no comment on the company’s break-even price for iron ore or the prospects of a takeover. A representative for Atlas Iron and Gindalbie didn’t return a call seeking comment. All three companies are based in Perth.
London Mining, valued at more than $800 million in 2011, went into administration in October. Just hours before the company’s Marampa Mine in Sierra Leone was set to close, it was bought by Timis Corp., the administrators said on Nov. 3. Credit also dried up in September for Western Desert, which operates the Roper Bar project in Australia’s Northern Territory. Receivers have started to look for potential buyers.
It’s not only tumbling prices that are threatening smaller producers. Companies unable to recover their production costs also find it harder to obtain financing, while project writedowns become more likely, Greg Smith, head of research at Sydney-based Fat Prophets, said by phone.
“There are going to be plenty of assets around or moth-balled operations, if it gets to that,” said Smith.
M&A, Activism
Some miners that are close to breaking even at the current iron ore price might be able withstand the commodity’s slump by halting production until the market picks up, said Ernst & Young’s Elliott. Those that can’t may also be targets, he said.
Funds such as London-based X2 Resources, co-founded by former Xstrata Plc Chief Executive Officer Mick Davis, are logical buyers, according to Elliott. Some funds can wait years before profiting from an investment and may be able to buy the assets “relatively cheaply,” he said.
Resources companies sitting on millions of tons of reserves, mining licenses and other assets may also appeal to activist investors who could push for changes to boost returns. For instance, a breakup of Arrium Ltd., the iron ore producer that’s fallen 83 percent this year, might unlock value in the company’s unit that makes rail wheels and metal balls, Morningstar Inc. said last month.
Waiting Game
Shares of Atlas Iron, which digs for iron ore in Australia’s Pilbara region, have tumbled 82 percent this year. That’s even after the company cut capital expenditure and raised cost-saving targets. BC Iron (BCI) has dropped 89 percent and Gindalbie has plunged 75 percent.
According to UBS estimates, Gindalbie started losing money when iron ore fell below $98 a ton, while Atlas and BC Iron became unprofitable when the price dropped through about $80.
The stock collapses reflect doubts the companies will ride out iron ore’s price slump, said Shannon Rivkin, a director at Rivkin Securities Pty in Sydney.
“It’s guaranteed that we’ll see a lot more companies go out of business,” Rivkin said by phone. “There will be buyers but they’re going to have deeper pockets and longer timeframes. Iron ore prices are not going to be this low forever.”
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