Miners need iron ore prices to steady to hold share gains

Nanjing Night Net

Iron ore has plummeted as much as 67.3 per cent from its 2014 high of $US144.18 to a low of $US47.08 reached in early April. Photo: Erin JonassonShares in Australia’s listed miners have mimicked the strong rebound in the iron ore price, but with Chinese growth forecast to soften in the second half and supply to remain high, the price of iron ore and resources stocks may still suffer.

Over the last month, the price of iron ore�0�2for immediate delivery at the port of Qingdao in China�0�2has jumped more than 30 per cent to $US61.40 a tonne, according to Metal Bulletin.

Iron ore plummeted 65.2 per cent from its 2014 high of $US135.27�0�2to a low of $US47.08 �0�2in early April.

Since early April, Fortescue Metals shares have surged 43.4 per cent, BC Iron shares 57.4 per cent, and Mount Gibson 12 per cent. Atlas Iron has been in a trading halt since April 2 after it was forced to stop mining some of its operations.

Shares in major miner�0�2BHP Billiton have added 4.3 per cent over the last month, while Rio Tinto has gained 4.7 per cent.

However, the impact the iron ore price crash had on the smaller miners’ share prices has not come close to reversing.

Fortescue shares are still down 55.2 per cent since the beginning of last year, Atlas shares down 89.6 per cent, Mount Gibson shares down 78.3 per cent, and BC Iron shares have plummeted 90.8 per cent.

Rio and BHP have been less affected thanks to a range of factors, including resource diversification, break-even cash costs, and grade qualities. Since the start of 2014, Rio shares have dipped 13.7 per cent, while BHP is 16.3 per cent lower.

UBS is forecasting iron ore to fall to $US45 a tonne in the second half of 2015, and current share prices are factoring in an iron ore price higher than that.

Fortescue’s share price factors in an iron ore price closer to $US55 a tonne, while BC Iron’s �0�2was factoring in a price around the $US51 a tonne mark and Atlas closer to $US52 a tonne.

“If prices were to stay at $US60 per tonne, or better, then clearly the market will react favourably to that,” UBS analyst�0�2Glyn�0�2Lawcock said. “That’s the price you need iron ore to stay for a couple of years and Fortescue needs to keep its cost base down where it is to deleverage. There’s a lot of water that needs to flow under the bridge in terms of time for that to occur.

“We still believe that supply needs to be rationalised to rebalance the iron ore market, given that iron ore demand growth looks set to fall dramatically from recent rates as Chinese steel production reaches and maintains peak levels for the rest of this decade.”

Mr Lawcock said UBS had a neutral rating on Mount Gibson because of its strong net cash position, and low leverage could help it during the volatile price period. According to UBS analysis, Mount Gibson’s share price was factoring in an iron ore price of around $US51 a tonne.

“Our sell recommendations on Fortescue and Atlas reflect their higher leverage and net debt positions, which we see as more risky, given that our estimates for their break-even prices are in line, or above our second half 2015 forecast for iron ore of $US45 [a tonne].”

BHP is rated a buy, with UBS tipping oil to rebalance sooner than iron ore and the company to benefit from the demerger and separate listing of South32, Mr Lawcock said. Rio is rated neutral.

“Combined with new supply under construction and set to commission over the next few years, our analysis shows the market moving into a protracted surplus. In our view, the price rally seen this week reflects slightly improved sentiment, as we have seen initial indications that supply rationing may be under way.”

Atlas has lowered its output by around 5 million tonnes, Vale has hinted it may switch off 30 million tonnes a year�0�2of its high-cost capacity if prices fell even lower, and BHP is increasing supply at a slower rate as it aims to hit 290 million tonnes a year, Mr Lawcock said.

This story Administrator ready to work first appeared on Nanjing Night Net.

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