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Sunday, September 04, 2005

Iron Ore - market Outlook

The iron ore market has been a very profitable division for the major multinationals that dominate the industry in year years. The 5 biggest players below account for about 80% of global supply:
  1. Rio Tinto (Aust, India?)
  2. CRVD (Brazil)
  3. BHP (Aust, Brazil, India)
  4. Assamang (South Africa, Morroco)
  5. ?? (forget the French company)
About 8-10 years ago, these companies engaged in alot of takeovers to consolidated the industry. They might have thought they had the industry wrapped up because they bought into a lot of the strategic 'long-life' resources in the major existing provinces. Since then, a number of alternative project sponsors have arisen, developing smaller deposits, some abandoned projects (AUX) & mines from previous times (AZR, TEA). Iron is concentrated in the earth in different styles of deposits, including:
  1. Magnetite deposits, eg. formed by weathering of iron-rich rocks I think. They are typically higher grade. eg. WA, Brazil
  2. Magnetite sands, eg. In NZ & Indonesia you get magnetite sands being concentrated along coastlines in ancient & modern deposits.
  3. Haematite deposits, eg. Primary skarn (metamorphic) deposits associated with intrusive igneous rocks
  4. Peat bog deposits, eg. Philippines, Indonesia, formed by chemical deposition of iron from iron-rich volcanic brines.
  5. Titanomagnetite deposits, eg. Africa and WA. These are associated with layered intrusives.
The highest grade deposits are 60-70%Fe, however some of the lower grade deposits are just 30-40%Fe. This may or ma not be an issue if crushing & grinding (at cost) can release the higher grade iron. Of course few people consider the higher cost element whilst prices are running at $US100-120/tonne. Unfortunately, by the time a great number of thee projects are commissioned, the major producers will have expanded, Chinese demand would have slumped and a raft of new suppliers will have emerged. Perhaps my pessimism is premature. Regardless, there is money to be made in the short term, as long as global economics is a "growth story" rather than a "yield (bonds) story".

So lets consider some of these prospective projects. Most of them arise because sponsors have managed to get the support of brokers keen to earn commissions. Some of the projects have merit. Most of them justify themselves by reference to an "unquantified" China growth story. Regardless, its always possible to find an opinion which supports your project. Regardless, these are investments you trade. Certainly in the long term China will require alot of iron ore, but make no mistake, it will be found. I guess there will be a surplus of resources in another year, and the consequent surplus will probably take 2-3years to be absorbed by the market. Lets consider all the projects that I'm aware of:

  1. Aztec Resources (AZR): Developing an old BHP mine in the Pilbara region, WA.
  2. BHP, Rio expansions: These expansions are in the Pilbara region of WA.
  3. Hancock Mining: Private company with project in Pilbara, WA. Financed by iron ore mining royalties
  4. Fortescue Metal (FMG): Listed ASX company developing a Pilbara based mine, using established rail & port.
  5. Lynas Corp (LYC): Project in the Pilbara area.
  6. AKD Ltd (AKD): Indonesian peat bog iron deposit
  7. Aurox Resources (ARX): Aurox Res titanomagnetite deposit in WA.
  8. Mineral Commodities (MRC): South African titanomagnetite deposit (RSA financed)
  9. Territory Iron (TEA): Intrusion-related skarn deposits in the Northern Territory, Australia. These were mined by Sumitomo in the 1970s. Close to the new railway.
  10. Anooraq Resources (ARQ.TSX): Yemen titanomagnetite deposit (Canada financed)
  11. Indian projects: I am sure there are Indian companies expanding projects to get their hands on foreign exchange.

The Rio & BHP-inspired consolidation of the iron market was intended to deliver premium prices for producers. They have benefited from that strategy for about 10years, but it was never going to last forever. The problem being they are victims of their own success. Higher prices spark new project sponsors. In defence of their strategy, these circumstances arose because of Chinese demand, not over-rationalisation to create tight market conditions.

Of the above companies, Aztec Res at 18c looks like particularly good (technical) buying, and the Aurox Res project in Indonesia is also attractive. Unfortunately I can post charts here.
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Global Mining Investing $69.95, 2 Volume e-Book Set.
Author, Andrew Sheldon

Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

Global Mining Investing - see store

Click here for the Book Review Visit Mining Stocks

Download Table of Contents and Foreword

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