Number 1 - Lower lump and pellet premiums impact Cliffs Natural
Resources Inc (
), Labrador Iron Ore Royalty Corporation (LIF-UN.TO) and NML.TO;
UPGRADING New Millennium Iron Corp (NML.TO) to Outperform; Revising
Estimates and TP.
In this, the maiden edition of 'North American Iron Ore Review',
we update our earnings expectations and valuations for CLF,
LIF-UN.TO and NML.TO as a result of recent changes to our house
commodity price forecasts. We have downgraded our lump and pellet
premium forecasts as illustrated in the full report. Headline 62%
index fines forecasts are unchanged.
There is an increasing trend for steel growth markets such as
China to build steel capacity with integrated agglomeration
capacity (sintering or pelletising) attached to the steel mill.
Given that the Chinese have ample sintering and pelletising
capacity, they remain unwilling to pay a premium for higher VIU
products such as lump and pellet.
CLF produces ~50% of total tonnage at Koolyanobbing (Australia)
as lump and basically 100% of the US Iron Ore production is pellet.
Wabush also produces pellet and represents about one third of
Eastern Canadian production. Although our underlying valuation has
come down slightly, we maintain our bottom-of-street US$72/sh
target price and NEUTRAL rating.
IOC (and indirectly LIF-UN.TO) will be increasing concentrate
capacity to around 22mtpa in early 2012 and has capacity to
pelletise around 13mtpa of this. In 2011 total sales consisted of
4.87mt concentrate and 8.71mt pellet. Our LIF-UN.TO target price is
reduced to C$45/share but OUTPERFORM rating maintained.
We don't expect any of the hematite from NML's 4.2mtpa starter
project to attract a lump premium, but roughly 15mtpa of a total
22mtpa of the KeMag/LabMag project is conceptually going to be
pellet. Although the raw DCF has been reduced, we maintain our
C$2.95/sh target price on the basis that our risk multiples have
increased. We are upgrading NML.TO to OUTPERFORM.
Neither ADV.TO (C$3.50/sh, NEUTRAL) nor LIM.TO (C$7.80/sh,
OUTPERFORM) are expected to produce commercial lump or pellet but
rather beneficiated concentrates, so the lump/pellet premium
reduction does not impact them. Valuations and ratings are
The Iron Ore section from our Commodity Teams' Forecast Update
piece has been reproduced at the back of this report which contains
our latest views on the commodity space.