Geordie Mark: Global Demand for Iron Ore on Rise
Source: Brian Sylvester of
How long until the window on rising iron-ore prices closes?
Global demand is driving prices higher and shipping costs are at
historic lows. But only companies poised to get into production
quickly will be able to capitalize. In this exclusive interview
The Gold Report,
Geordie Mark, an analyst with Haywood Securities in Vancouver,
picks the companies that are ready to profit and those that are
likely to get picked off by competitors.
The Gold Report:
BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF)
, one of the world's largest suppliers of iron ore, recently
submitted an environmental review for a proposed $48 billion
expansion of the Port Headland Harbor in Western Australia to
accommodate the doubling of iron ore production from its Pilbara
operation. When a company's willing to spend $48 billion at one
operation, what does that tell us about the long-term
fundamentals about the iron ore business and, ultimately, the
The thesis there is one of global growth in steel demand
resulting from continued industrialization from advancing
economies, particularly China. At the moment, China produces
somewhere near 45% of the world's steel.
On the back of that, India is continuing to grow its internal
steel production at greater than world average rates. So, 37% of
the world's population, which includes only China and India, has
significant growth in its underlying steel consumption and
If you take a step back, these countries are both in the
juvenile stages of their steel use. They still have a long way to
go in ramping up their countrywide infrastructure requirements.
This trend is expected to continue for a number of years, if not
Investors commonly think of China and India as the primary
drivers behind steel demand. However, I have a November 2010
report from UBS, which estimates that steel consumption this year
will rise by 4.5% in Europe, 4.5% in Russia and 5% in Brazil-a
little bit more than India and China. The growth forecast gets
even more bullish in 2012. Are Haywood's numbers similarly robust
in countries outside of China and India?
I would have to agree. China is obviously the main source of
growth due to its size. For example, China's steel consumption is
roughly eight times that of the U.S. But we are seeing
significant growth from other countries, too. There are
significant growth projections coming out of Europe, Russia and
Brazil. The World Steel Association estimates global growth this
year at 5.9% and 6% for 2012.
All that competition for iron ore is driving up the cost. China's
imports of iron ore in the first quarter rose almost 15% to about
177 million tons (Mt). Meanwhile, the average import price was
$156.50/ton in the first quarter, about 60% higher than in the
year-early period. What are some ways to play this remarkable
To play the growth, investors could look to companies that are
either entering into production or can enter production in this
period of high prices, which we believe will be about five years.
In the short term that could include companies entering into
production this year in order to get near-term cash flow and
strong margins. An example is
Labrador Iron Mines (TSX:LIM)
. We expect Labrador to start production within about a month's
time from a direct-shipping style operation.
Investors could also find growth in development-stage
companies that could go into production within the window of high
prices. For example,
Northland Resources S.A. (TSX:NAU)
has a project it anticipates it will start mining in late 2012
for high-quality iron ore concentrate product.
What's your prediction for prices a year out from now?
This year we are forecasting an average price of around
$139.50/tonne for 62% Fe iron ore FOB Brazil. Next year, we
forecast about $124/tonne.
Why are the prices going down?
We have taken a conservative approach to building our forward
commodity price curve given known supply growth, as well as
uncertainty surrounding seaborne transport rates. Furthermore,
concordantly, the commodity has witnessed elevated pricing
volatility whereby about a year ago, the industry came off an
annual benchmark approach where the Big Three, that's
Vale S.A. (
Rio Tinto (NYSE:RIO; ASX:RIO)
and BHP, negotiated with steel producers on an annual basis to
fix prices. The rotation of the mechanics of commodity pricing
within this industry was a result of the underlying demand-driven
environment, which now places the iron ore producers with a lot
more say in negotiations.
World iron ore pricing rotated out of an annual benchmark into
quarterly indexing and a greater reliance on the spot price
markets. In the last first quarter and second quarter price
negotiations, we have increases in prices for the Big Three, but
as stated earlier we will also see greater volatility in the spot
market relating to seasonal events and any fundamental policy
changes out of China and other growth steel producers. Since we
do see greater potential for volatility in the market going
forward, we're resting on the conservative side for pricing.
The value of companies with iron ore assets or projects increased
by an average of 400% between October 2005 and October 2010,
whereas the value of metallurgical coal companies increased 34%
during that same time, according to the UBS report. Steel
companies were up 12% during that period. Part of that value
creation is because steel companies have gone upstream and bought
iron ore juniors to control the cost of supply. Do you expect
that trend to continue?
I would say the valuation metrics driving steel companies and
companies with iron ore assets differ appreciably given that the
steel companies work on operating margins and output growth,
whereas companies with iron ore assets and projects have moved up
because they're increasing the underlying resource base, lowering
apparent risk by moving through development or entering
production in a market with elevated commodity prices.
We do see vertical integration being a very significant
component going forward for the steel producers. Steel producers
want to hedge away from the Big Three. These companies want to be
independent and integrate their cost management into locking up
some of their iron ore at cost. Such integration enables steel
companies to be more competitive when selling steel. We believe
that there is likely to be continued vertical integration in the
sector as steel producers lockup supply and protect the
underlying cost base.
One example of that was when
Cliffs Natural Resources Inc. (
Consolidated Thompson Iron Mines Ltd. (
That's exactly right. Cliffs and Consolidated Thompson have a lot
of operational synergies in the Labrador Trough. Cliffs was able
to pay a good price for Consolidated Thompson. The Canadian
operations had operational synergies, so that arrangement worked
Another example of vertical integration would be
Tata Steel Ltd. (LSE:TTST; Grey Market:TATLY)
forming a joint venture with New
New Millennium Capital Corp. (TSX.V:NML)
on a direct-shipping ore project in the Schefferville-Labrador
Trough, as well as participating in a bankable feasibility study
on New Millennium's large taconite deposits near
There is good vertical integration potential in the sector,
particularly within areas that have existing infrastructure or
reasonable assurance in terms of asset ownership. Canada is a
very good home for such activity.
You recently revised your price target on
Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF)
from $3.90 to $5.80 after it published a resource estimate on its
Kami iron ore project in Labrador. Was it the size of the
estimate that made you revise your target?
We were pleasantly surprised by the resource estimate. Alderon
reported an Indicated iron ore resource of 490 (Mt), plus an
inferred resource of 118 Mt. Just today, the company brought out
some drill-hole results on North Rose, which is outside the
defined resources, and looks as though it has potential to add
resources. Alderon did surprise on the upside and we give it some
more credit on that basis.
What were your thoughts after visiting the property and meeting
My take is that the management is made up of very strong group,
and this is married with a very strong board. A significant
component of the current board is that many were also on the
board of Consolidated Thompson during its pre-production
In terms of the property, it's all location, location,
location for infrastructure. The Kami property is within 15 miles
of four operating mines with four options to get to a public rail
system. Those components work well together for this project.
Would those factors make it a takeover target?
It has potential. The main other component is that it is
independently owned. There are no steel producers involved in the
company at the moment. Its largest shareholder is
Altius Minerals Corporation (TSX.V:ALS)
because it originally held the property. I definitely think
Alderon could be a potential takeout candidate in the long
Are there some other promising juniors that you follow?
Another independent iron ore company in that same mining area is
Champion Minerals Inc. (TSX:CHM)
. It has a portfolio of projects with around 1.5 billion tons of
NI 43-101 compliant resources. Its flagship project, Fire Lake
North, is not too far away from
existing Fire Lake Mine. Champion potentially still needs a
little more infrastructure to come into play, but it has a very
good portfolio of assets going forward. We have a target of $4.20
for Champion stock. Recently, it was trading at about C$2.38.
Any other juniors in the Labrador Trough there?
I mentioned Labrador Iron Mines, which is entering production
this year. It probably will produce just less than 1.5 Mt. of 62%
direct shipping iron ore style product.
Who are the major shareholders in that play?
The main shareholder is
Anglesey Mining Plc. (LYSE:AYM)
. The second major shareholder is Passport Capital.
There is also New Millennium Capital Corp., which has a
joint-venture project with Tata Steel, its largest
Given Tata's large stake in New Millennium, it's probably not a
takeover target. But are Champion and Labrador?
Alderon, Champion and Labrador all have the potential to be taken
We are also looking at Northland Resources being one of the
next producers, although it isn't in the Labrador Trough.
Where is that project located?
It has two projects. Its flagship is the Kaunisvaara project in
Sweden, which is fully permitted for production, and is in
development at the moment.
Sweden has a long history of iron ore mining. This project
would export out of Norway, and would probably be predominately
selling to a European market. The project is expected to output a
very high-quality product at around 69% Fe, and we think the
company could fetch a good premium for the product.
What can investors expect in the iron ore market in the near
Growth should continue to emanate out of China and India, and
bolstered recovery is taking hold in Europe, particularly Eastern
Europe, and North America. Another feature to look at is the cost
of seaborne freight. There have been continuous lows in the
market for seaborne freight because of surplus capacity that
should continue for a number of years. Demand growth and lower
transportation rates provide fantastic opportunities for pricing
protection to moderate operating margins for projects entering
production or at the development stage.
Thanks for your time, Geordie.
Dr. Geordie Mark, a research analyst with
, focuses on uranium companies involved in exploration,
development and production. He joined Haywood from the junior
exploration sector, where he was vice president of exploration
for Cash Minerals, which concentrated on uranium and iron
oxide-copper-gold targets across Canada. Prior to joining the
exploration industry, Mark lectured in economic geology at
Monash University, Australia, and served as an industry
consultant. He completed his Ph.D. in geology in 1998 at James
Cook University's Economic Geology Research Unit in Australia,
specializing in aqueous geochemistry and igneous petrology
applied to ore-forming systems.
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
3) Geordie Mark: I personally own shares of the following
companies mentioned in this interview: Northland Resources.
Haywood Securities, Inc. has reviewed lead projects of Alderon
Resource Corp. and Champion Minerals Inc. and a portion of the
expenses for this travel have been reimbursed by the issuer.
Haywood Securities Inc. or an Affiliate has managed or co-managed
or participated as selling group in a public offering of
securities for Alderon Resource Corp. and Champion Minerals Inc.
in the past 12 months.
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