iron ore: price fundamentals - rc...

Resource Capital Research

March Quarter 2010, Iron Ore Company Review Disclaimer and disclosure attached. Copyright© 2010 by Resource Capital Research Pty Ltd. All rights reserved. 37 37

Iron Ore: Price Fundamentals

Analyst: Dr Trent Allen

Sector outlook and iron ore price forecast

It is clear that fiscal stimulus of the steel sector has succeeded.

Recovery in iron ore demand, which began late 2Q09, is ongoing and

should continue to support a long-term recovery in prices.

There have been several drivers of this recovery, which began in 2Q09.

The main one is demand from China, which has returned to long-term

trends for iron ore imports, production and inventory levels, from which

it barely deviated during the crisis. Other drivers of consumption have

included production cuts across the entire minerals sector, although

production is now returning to pre-GFC levels, and growing optimism

among consumers.

As Chinese demand has been supporting the global commodities space,

threats to the Chinese economy are of concern. There has been some

speculation that the stimulus-driven availability of cheap cash could

create a Chinese credit bubble, the collapse of which would affect world

markets.

The abundance of credit might also have created overcapacity (and

future oversupply) in the Chinese steel sector. This is the reason behind

China‟s 4Q09 decision to close steel firms with capacity below 1mtpa,

and apply stricter environmental regulations to the others. This could

remove ~2.5% of capacity, which is currently around 700mtpa.

Other risks to iron ore include the end of Chinese stockpiling, which has

supported consumption; the easing of global production cuts, which

have supported prices; and investment in new mines to meet the

perceived increase in demand, which could create mid-term oversupply.

The global financial crisis reached iron ore markets in September 2008.

Prices of steel products and iron ore fell by up to 65% during the GFC.

This led to long delays in resolving 2009/10 iron ore contract price

negotiations. Prices were settled in July 2009 between the main iron ore

producers (Vale, Rio and BHP), and Japanese, Korean and European

buyers. These prices are below 2008 levels – e.g. Rio, US$0.97/dmtu

fines (US$62/t at 64% Fe), a 33% reduction; and US$1.12/dmtu lump,

a 44% reduction - but are 20% higher than in 2007. BF pellet prices are

at a 30% premium over fines, but 48% below 2008 prices.

Steel prices also fell during the GFC and although there has been a

recovery they remain below early-mid 2008 levels, e.g. steel standard

plate prices (US$610/t) are 51.7% lower their July 2008 peak.

Negotiations with Chinese steel producers were eventually abandoned,

with Government-controlled China Iron & Steel Association (CISA)

asking for a 40% contract price reduction below 2008 levels. The

situation has been clouded by a recovery in Chinese iron ore spot prices

in line with consumption, reaching a YTD high of US$133.4/t (CFR for

The iron ore sector has recovered from the GFC, driven by demand from China … … as well as iron ore production cuts, fiscal stimuli and investor optimism. The speed of the recovery could cause some problems for China, such as a credit bubble and overcapacity in the steel sector. A slowing of demand, and mid-term oversupply of iron ore, could affect the iron ore market. Iron ore contract prices in 2009 were 33% below those in 2008 … … but these were not accepted by the main consumer, China. Iron ore spot prices have recently peaked at US$133.4/t, more than double the benchmark price.



62% Fe fines) in March 2010 which, allowing for US$10-US$30/t freight,

is approximately double the non-China benchmark price.

In the absence of a benchmark price, iron ore sales to China by the

major producers (e.g. Rio) have been made under provisional price

schemes based on the 33% discount.

Iron ore FOB prices, contract versus spot

0

20

40

60

80

100

120

140

160

Dec-0

8

Jan

-09

Jan

-09

Feb-0

9

Mar-

09

Mar-

09

Ap

r-09

May-0

9

May-0

9

Jun

-09

Jul-

09

Jul-

09

Aug

-09

Sep

-09

Oct-

09

Oct-

09

No

v-0

9

Dec-0

9

Dec-0

9

Jan

-10

Feb-1

0

Feb-1

0

US

$/t

at 62%

Fe

Contract Spot Source: Bloomberg

The 2010 contact negotiations have started, with forecasts by industry

commentators and iron ore and steel sector participants of a contract

price increase of anywhere between 20% and 90% (the latter from

Vale). It is likely that negotiations will be protracted.

Currently, it seems that BHP, RIO and possibly Vale want to abandon

the traditional benchmark altogether, in favour of shorter contacts and a

more transparent index-based pricing scheme. For example, BHP has

agreed to “spot volume” contracts using a defined number of tonnes for

each order, but billed on a spot price basis. This could also favour the

smaller steel mills, especially in China, that have previously been locked

out of the contract system and forced to buy ore at higher prices on the

spot market. Much of the ore that would previously have been sold at

spot might be drawn into a new indexed or short-term contract system.

Nominal US dollar contract prices are currently below a 20 year trend

line of iron ore contract price data (Vale Brazilian fines). However, real

prices are well above a similar longer term trend line of prices going

back to 1960 (US PPI adjusted). This suggests the iron ore market, like

other commodity markets, continues to adjust to the impact of

increased global aggregate demand due to the rapid rate of Chinese

growth over the past five years.

If we accept that fundamental conditions in the iron ore market have

changed irrevocably, due to Asian urbanisation, then the shorter term

regression is likely the more accurate. In line with firming market

sentiment, we have revised our near-term contract price forecast to

USc130-150/dmtu (FOB) for fines (US$80-US$93/t for 62% Fe), a wide

ranging increase of 30% to 50%, averaging 40%. Long-term iron-ore

prices will be tied to GDP growth of the main end-users, i.e China, Japan

and the USA. RCR‟s long-term forecast is for US$40/t at 62% Fe for

fines and US$48/t for lump

The big rise in the spot price will greatly influence ongoing contract price negotiations for 2010/11 … … with some stakeholders, such as Vale, predicting an increase of 90%. It is likely that the benchmark will be partly abandoned for a more flexible, index based system. RCR believes fines prices (Brazil) could return to US¢ 130-150/dmtu (US$80-93/t) near term, an average rise of 40%. Long-term forecast is US$40/t for fines.



Monthly average contract prices for iron ore fines: US$/t, range

Sep ‘89 to Feb ’10 (20 years), nominal.

0

20

40

60

80

100

120

140

160

Feb-90 Feb-92 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10

USc

/dm

tu

Iron ore fines (Fe 64.5%) Brazil to Europe, FOB US¢/Fe unit, nominal

Source: UN, Metal News, FerroAlloyNet

Monthly average contract prices for iron ore fines: US$/t, range

1960 to 2010 (50 years), US PPI normalised.

0

20

40

60

80

100

120

140

160

Jan

-60

Jan

-62

Jan

-64

Jan

-66

Jan

-68

Jan

-70

Jan

-72

Jan

-74

Jan

-76

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Jan

-12

USc

/dm

tu (P

PI

no

rmlis

ed

to

Ap

r '0

9)

Iron ore fines (Fe 64.5%), Brazil to Europe, FOB US¢/Fe unit, real)

Source: UN, Metal News, FerroAlloyNet, US Bureau Labor Statisitics

The main uncertainties to our price forecasts:

Relative strength of the USD.

Global aggregate demand and the continuing effect, if any, of

economic stimulus packages on commodity prices.

Potential price volatility from changes in the structure and

pricing of iron ore contracts, e.g. a move to shorter-term

contracts or linking of contracts to spot prices via an index.

Long-term nominal contract prices are below average on a 20 year scale and suggest a recovery to US¢130/dmtu in the coming year (35% increase), with upside risk towards US¢150/dmtu (55% increase). However, they are above the real average on a 50 year scale. This trend suggests a long term price of ~US¢65/dmtu, or US$40/t. Our forecasts depend on stability in the US dollar.



Iron Ore Equity Performances

Yearly equity performances of 57 Australian listed iron ore juniors (plus

FMG) have outperformed the S&P/ASX200: prices rose an average

208% in the past 12 months (ASX200 50%), 9% over the past three

months, and 9% over the past 1 month (ASX200 3%). The companies‟

share prices, on average, are 32% below their 12-month highs but

258% above their 12-month lows. The best performers on our list

include Sphere Minerals Ltd (ASX:SPH), up 35% in a month due to

growing confidence in its advanced Mauritanian magnetite and DSO

projects; and Iron Road Limited (ASX:IRD), which gained 886% in 12

months after exploration success at its Central Eyre Project in SA. The

largest company on the list, Fortescue, is up 90% for the year and is

119% above its yearly low. Canadian listed stocks have also performed

strongly, with 48 companies showing an average 12 month increase of

149% and a 3 month rise of 3%, and sitting 30% below yearly highs.

The best 1 month performer (+39%) was Macarthur Minerals

(TSX:MML), which is developing the Lake Giles magnetite / DSO project

in South Australia.

Main uses and demand

Iron ore‟s primary use is for steel making. Steel production is a good

measure of iron ore consumption, although the correlation is not direct

due to lags from stockpiling, as well as waste in the steel-making

process and the re-use of scrap steel. (In the US, scrap steel

consumption in 2008 was estimated to be 48mt, compared to raw steel

production of 55.9mt – in fact, in the US auto industry in 2008 the

recycling rate was 106%, meaning more steel was produced by

recycling old vehicles than was used to make new ones). The world‟s

main steel producing nation is China, with 550mt (48.5%) of the

estimated global raw steel production in 2009 of 1,133mt. This was up

from 500mt (37.6%) in 2008 and 478mt in 2007.

Raw steel and pig iron production by nation in 2008 and 2009

[units mt]

Source: USGS. e= estimate

2009e 2008 2009e 2008

China 540 471 550 500 Japan 61 86 79 119

Russia 40 48 55 69

Korea, Republic 26 31 47 53

Ukraine 25 31 28 37

Brazil 22 35 24 34

United States 18 34 56 92 Germany 17 29 29 46

France 7 12 12 18

United Kingdom 7 11 9 14 Italy 5 11 18 30

Other countries 96 133 226 318

World total 864 932 1,133 1,330

Pig iron Raw steel

Australian junior iron ore stock prices are 21% below 12-month highs but 306% above 12-month lows. China is the world’s major producer of steel and user of iron ore … Three of the top five steel producers are in Asia. China and Russia are in the top five for both consumption and production of iron ore.



The USGS estimates that global steel production in 2009 was 1133mt.

The IISI crude steel production index, global steel production for 2009

was ~1170mt. Total production in 2010 is likely to be similar to 2009.

In 2008, the largest individual suppliers of steel were ArcelorMittal

(103.3mt), Nippon Steel (35.5mt) and Baosteel (35.4mt). Four of the

top five companies were the same in 2007 and 2008, with China‟s Hebei

a new entry. These companies (or in China‟s case a national

representative such as the China Iron & Steel Association) negotiate

annual iron ore contract price with Vale, Rio and BHP.

Ranking of individual steel producers, 2007 and 2008

Rank mmt Rank mmt Company Country

1 103.3 1 116.4 ArcelorMittal UK

2 37.5 2 35.7 Nippon Steel Japan

3 35.4 5 28.6 Baosteel Group China

4 34.7 4 31.1 POSCO Korea

5 33.3 NA 31.1 Hebei Steel Group China

6 33 3 34 JFE Japan

7 27.7 11 20.2 Wuhan Steel Group China

8 24.4 6 26.5 Tata Steel India

9 23.3 8 22.9 Jiangsu Shagang Group China

10 23.2 10 21.5 U.S. Steel USA

11 21.8 8 23.8 Shandong Steel Group China

12 20.4 12 20 Nucor USA

20072008

Source: worldsteel.org

Production and reserves

In 2009, the largest iron ore producers, by nation, were China (900mt),

Brazil (380mt) and Australia (370mt). Total production was ~2,315mt, a

~4.5% year-on-year increase from 2008 (which saw a 10% rise from

2007). The three largest individual producers were CVRD (Vale) of

Brazil, Rio of Australia/UK and BHP of Australia.

Note that some producers were operating below capacity during the

2009 downturn. For example however, they have now likely returned to

full production. Australia‟s Fortescue Metal Group joined the list in mid

2008, with a current capacity of ~37mtpa iron ore.

Australian Government agency ABARE forecast that the global seaborne

iron ore trade would be 914mt in 2009, up 3% from 887mt in 2008, and

would increase to 998mt in 2010 (9.2%). The biggest exporter in 2009

and 2010 was and is expected to be Australia, with 352mt (38.5%) and

394mt (39.5%) respectively.

The largest individual steel producer in 2008 and 2007 was ArcelorMittal (UK) In 2008, the three major iron ore suppliers, by nation, were China, Brazil (Vale) and Australia (BHP & RIO). ABARE is forecasting a 9.2% increase in the iron ore trade from 2009 to 2010.



National mine production and reserves of iron ore (mt)

2009e 2008 % change Crude Ore Iron Content % Fe

China 900 824 9.2 22,000 7,200 32.7

Brazil 380 355 7.0 16,000 8,900 55.6

Australia 370 342 8.2 20,000 13,000 65.0

India 260 220 18.2 7,000 4,500 64.3

Russia 85 100 -15.0 25,000 14,000 56.0

Ukraine 56 73 -23.3 30,000 9,000 30.0

South Africa 53 49 8.2 1,000 650 65.0

Iran 33 32 3.1 2,500 1,400 56.0

Canada 27 31 -12.9 1,700 1,100 64.7

United States 26 54 -51.9 6,900 2,100 30.4

Kazakhstan 21 23 -8.7 8,300 3,300 39.8

Sweden 18 24 -25.0 3,500 2,200 62.9

Venezuela 16 21 -23.8 4000 2,400 60.0

Mexico 12 12 0.0 700 400 57.1

Mauritania 11 11 0.0 700 400 57.1

Other countries 47 47 0.0 11000 6,200 56.4

World total 2,315 2,218 4.4 160,300 76,750

Mine production (mt) Reserves (mt)

Source: USGS. e = estimate.

Iron ore production by percentage of total (2,315mt, 2009e)

39%

16%

16%

11%

5%

4%

3%2%

2% 1% 1%

China

Brazil

Australia

India

Other

Russia

Ukraine

South Africa

Iran

Canada

United States

Source: USGS. e = estimate.

Brazil and Australia have high quality resources and dominate the seaborne iron ore trade. China has the highest levels of iron ore mine production: an estimated 39% of global supplies in 2009 (37% in 2008), followed by Brazil with 16% (19% in 2008).



Iron ore production by top 20 company, 2009 and 2008

2009* 2008

1 Vale S.A. 241.1 303.7 17,201 VALE3 BMFB:BM&FBOVESPA

2 Rio Tinto Ltd 165.8 147.6 17,316 RIO ASX:Australian Stock Exchange

3 BHP Billiton Ltd 118.2 117.5 12,778 BHP ASX:Australian Stock Exchange

4 NMDC Ltd na 29.8 808 NMDC BSE:Bombay

5 Kumba Iron Ore Ltd 22.1 27.2 2,205 KIO JOH:Johannesburg

6 Mitsui & Company Ltd 26.7 25.1 1,591 TKY:Tokyo

7 ArcelorMittal na 21.6 4,509 MT NYSE:New York (NYSE)

8 United States Steel Corporation 8.6 20.4 723 X NYSE:New York (NYSE)

9 Cliffs Natural Resources Inc. 16.6 19.2 491 CLF NYSE:New York (NYSE)

10 Evraz Group S.A. 16.9 18.7 279 EVR LONG:London (GDR)

11 Eurasian Natural Resources Corp plc 15.2 15.5 1,998 ENRC LOND:London

12 Fortescue Metals Group Ltd 32.8 14.8 5,294 FMG ASX:Australian Stock Exchange

13 OAO SeverStal 12.9 13.3 1,848 CHMF CLAS:Russia (RTS Classic)

14 OJSC Novolipetsk Steel 13.5 12.7 51 NLMK CLAS:Russia (RTS Classic)

15 Sesa Goa Ltd na 12.4 203 500295 BSE:Bombay

16 Itochu Corporation 10.0 9.8 808 8001 TKY:Tokyo

17 Exxaro Resources Ltd 6.0 7.3 596 EXX JOH:Johannesburg

18 Mount Gibson Iron Ltd 6.4 6.1 124 MGX ASX:Australian Stock Exchange

19 Hancock Prospecting Pty Ltd 10.3 5.5 2,502 Private

20 Nippon Steel Australia Pty Ltd 5.7 5.3 281 Private

* Reporting may be incomplete

Equity Production (mt) Equity

Resource Ticker Code Primary ExchangeCompany Name

Source: Intierra – Resource Intelligence

Iron ore is sold both on long-term contract and into the spot market. It

is traded as fines, lump (larger pieces with a higher Fe content) and

pellets (refined). Iron ore lump earns a price premium over fines, due to

its frequently higher grade and the fact that it can be used directly in

steelmaking furnaces. Since 2001, the average contract price premium

of RIO‟s Pilbara lump over fines has been 30.3%, and is currently 13.7%

(USc0.97/dmtu fines, USc112/dmtu lump). Fines have to be sintered to

form pellets before they are used, as their small grainsize prevents the

necessary circulation of oxygen during smelting. Currently, the contract

premium for BF (blast furnace) pellets over fines is 30%. Higher grade

DR (direct reduction) pellets attract a higher premium (up to 50%).

Price history

In recent years, contract prices have been set by agreement between

the three main iron ore suppliers and the largest steel producers, in

Europe and Asia. Price negotiations have occurred annually, with many

agreements reached in January (Vale) or April (BHP, RIO); although,

contracts can end at a variety of times. The spot market is dominated

by smaller-volume iron ore producers and buyers. Contract prices rose

during the boom, increasing by 527% between mid 2001 and mid 2008

(fines, BHP). However, demand for iron ore fell during the GFC and this

was reflected in the 33% decrease in contract price agreed between the

Australian producers and non-Chinese Asian buyers. This price is still

10% above the 2007 contract price. The 2009 negotiations with China,

led by the China Iron and Steel Association, which replaced 2008 lead

negotiator BaoSteel, reached a deadlock in June. No official contract

prices to China were set in 2009. Negotiations for 2010 prices have now

started. The traditional date by which contracts are settled is April 1.

Brazil’s CVRD (Vale) was the world’s largest producer of iron ore in both 2008 and 2009. Pellets attract a premium over fines and lump. Contract prices rose more than 500% from 2001 to 2008, but 2009 contracts were set at a 36%-33% discount to 2008. No 2009 benchmark contract prices with China were set and 2010 negotiations have started.



Chinese iron ore statistics give an insight into the health of the global

sector, with the spot price falling through 1H09 before recovering at the

end of the half and into 2H09 and 1Q10, to reach levels similar to those

seen in 2007. For the past three months, the average Chinese import

spot price for 62% iron ore fines was US$115.2/t, up 32.7% from the

previous three months – the absolute change has been +50.9%. The

price has risen 7.3% in the past 30 days and is currently at US$133.4/t

which is a 12-month high but well below the US$202/t high of March

2008. The average internal Chinese spot price (Hebei/Tangshau fines)

has moved more slowly, increasing 31.25% over the past three months

to be up 8% YoY. The current price is RMB1050 (US$153.3/t). This is

~150% above the contract fines price (~US$60/t) settled in May „09

between global iron ore producers and non-China steelmakers.

China iron ore and concentrate imports fell 9.4% between January and

February 2010, to 46.6mt, but increased 44.4% YoY. In the past month,

the monthly average has fallen 21.4%. The long-term trend still

upwards but a slowdown in imports that began in 4Q09 is continuing.

This is quite typical of China‟s steel industry over the cooler months but

could be partly due to oversupply of steel.

China‟s total iron ore output fell 10.3% in the twelve months to June

‟09, with an 18.8% drop in 1Q09 from 4Q08. Output rebounded

dramatically in 2Q09, up 13%, and in 3Q09, up another 25%. In other

words, production fell rapidly into 1Q09 but has recovered. January‟s

production, of 88.2mt, is up 44.5% year-on-year. However, there was

little change in output between December 2009 and January 2010.

Estimated total output for 2009 was 892mt, 7.1% higher than in 2008.

Weekly inventory totals have remained flat for the past month, rising

about 1.8%, and are currently at 69.6mt. The average level of the past

three months is 68mt, which is 7.7% lower than the previous three

months (i.e mid September to mid December 2009). This is in contrast

to rises of 16.6% from 1Q to 2Q and 6.4% from 2Q to 3Q during

stimulus-driven iron ore stockpiling.

In terms of global refined steel products, the average price for Hot

Rolled Coil increased by 4.2% (to US$539/t) over the past three months

and has risen 6.2% over the past month, to its current US$596/t. The 3

month average is only 10.5% down year-on-year. Steel prices were

more strongly affected by the GFC than iron ore prices. The Steel Plate

three-month price shows a similar but shallower trend (down 3% YoY,

up 1.5% over the past three monthys). The IISI crude steel production

index increased 3.8% to a three-month average of 108.9mt/month and

is up 2% over the past month. As mentioned previously, global raw steel

production for 2009 was ~1170mt and is likely to be similar in 2010.

The average iron ore import spot price to China has increased by 32.7% over the past three months. China iron ore imports for February 2010 are up 44.4% YoY but there are signs of a slowdown. It has also increased internal production, with an approximate 892mt in 2009, a 7.1% increase over 2008. Output is now flat … … and inventories are slowly dropping after frantic stockpiling in 2009. The price of iron ore dropped in line with the price of steel, which fell 50-54% between 3Q08 and 3Q09 but recovered in 2H09 and is now flat or slowly increasing.



Iron ore: elemental facts

Iron is a chemical element with atomic number 26, specific gravity

7.874g/cm3 and the symbol Fe. It is the sixth-most abundant element in

the universe and composes ~5% of the Earth‟s crust. At atmospheric

temperatures and pressures it is a lustrous greyish metal that oxidises

easily. Most of the world's iron ore is produced from large formations of

haematite (Fe2O3) and magnetite (Fe3O4).

Iron ore, in commercial quantities, often occurs as sedimentary Banded

Iron Formations (BIF), or as an erosion product of such formations

called Channel Iron Deposits (CID) or Detrital Iron Deposits (DID).

When heated in the presence of a reductant, iron ore will yield metallic

iron (Fe). Due to its strength and abundance, iron is the most widely

used of all metals, both in its native state (e.g. cast and wrought iron,

which also contain carbon) and alloyed with other elements (e.g. silicon,

chromium, vanadium, tungsten, molybdenum, nickel) to form steels.

Stainless steel contains a minimum 11% of chromium by mass.

Haematite iron ore, when mined, is commonly crushed and split into

lump (i.e. golf-ball size) and fines components. There are systematic

differences between the lump and fines grades. Generally the lump

product is richer in iron and lower in the other minerals, compared to

the fines product. The grade differences between lump and fines,

together with the lump percentage, are referred to as the „lump

algorithm‟ (Source: AUSIMM). Lump ore attracts a premium due to its

higher metal content. Iron ore fines can be processed into high-grade BF

and DR pellets, which assist with oxygen circulation during smelting.

Magnetite ore is often of lower grade than haematite (~30% vs ~60%)

but can be beneficiated, often using gravity and magnetism, to form a

saleable ~70% concentrate.

The price of a dry tonne of iron ore is calculated by multiplying the price

per dry mtu of iron (ie 10kg of iron) by the per cent content of iron in

the ore, times 100. For example, if the price of iron ore fines is 97¢/Fe

dmtu, then the value per tonne of ore at 62% Fe content is 97¢ x 100 x

62% = 6014¢ or US$60.14/t.

Contract prices are set as FOB, or free on board, which in terms of the

seaborne trade means they don‟t include freight costs. Spot prices are

usually quoted as CFR, or Cost and Freight, which means the seller has

organised carriage to the destination port and added a freight charge.

This varies depending on transport distance – freight from Australia to

China is currently ~US$10/t, while from Brazil it is ~US$30/t.

Most commercial iron ore occurs as haematite and magnetite in, or derived from, large Banded Iron Formations (BIFs). Iron ore is reduced to metallic iron and can then be alloyed with other metals to make steels. Iron ore is mostly sold as lump, fines or manufactured pellets. Magnetite deposits are often lower grade than haematite but the ore can be improved by simple processing. Iron ore contracts are priced in Dry Metric Tonne Units (DMTU’s). FOB prices do not include freight costs, while CFR prices do.



Focus: Australian iron ore gets organised

The vital, heavy infrastructure required to develop iron ore deposits,

especially transport such as rail and port, can be costly to build or

upgrade. This has led to the formation of two alliances among WA

junior iron ore companies, with the common aim of creating or

gaining access to shared infrastructure in their districts.

The Northwest Iron Ore Alliance (NWIOA): is promoting the

development of infrastructure in the Pilbara. Its stated core objective is

to work with communities in the region, Government, infrastructure

providers, existing producers and other stakeholders to promote the

development of a junior iron ore industry. Specifically, the members are

seeking to use the Pilbara’s existing iron ore rail network, most of

which was built and is controlled by Rio, BHP and more recently

Fortescue. Two members, Atlas and BC Iron, have accessed the rail and

port network by forming JVs with Fortescue (FMG). A Government

Tribunal (ACCC) is currently hearing applications regarding third-party

access to these lines - in March 10 it granted the NWIOA interim

collective bargaining authorisation, to negotiate with the railway

operators. Also in March, the NWIOA presented a Pre-Feasibility Study

(SKM) of plans to build two shipping berths (combined 50mtpa)

at Port Hedland. The berths could be operational in 2H13.

The Geraldton Iron Ore Alliance (GIOA): is focused in WA‟s mid-

western region, which could produce 60mtpa-90mtpa iron ore products.

The members have stated that, while following their own development

strategies, they will cooperate in key areas such as infrastructure,

statutory approvals and Government/community relations. One of the

Alliance‟s aims is to promote and use the planned Oakajee Port and

Rail network. The OPR could be built and operated as a ~A$4b JV

between Murchison Metals (ASX:MMX) and Mitsubishi Development, with

assistance from State and Federal governments (A$678m for common-

use port infrastructure). The Oakajee Port would have an initial capacity

of 35mtpa iron ore, while the associated rail network could be scalable

to 80mtpa-100mtpa. Iron ore companies would pay a tariff to use the

network. A Bankable Feasibility Study is expected in March 2010;

the OPR could be operational by late 2013.

There have been discussions of an alliance forming in South Australia,

among iron ore juniors working on the Eyre Peninsula. Companies

focused on this district include Centrex (ASX:CMX), Iron Road

(ASX:LML) and Western Plains Resources (ASX:WPG). All have a

common interest in creating or expanding port access – the district is

well supplied with ports but has no deep water facility suitable for the

export of bulk commodities. Centrex has approval to redevelop Port

Lincoln but it is unknown if other companies will have access. Another

option is the proposed multi-user facility at Port Bonython. The Eyre

Peninsula Mining Alliance (EPMA) is yet to be established and the SA

juniors continue to pursue individual development agendas.

Milestone achievements by the two iron ore Alliances (e.g. rail and port

access agreements, successful feasibility studies), or the formation of

new alliances in WA or elsewhere, could be expected to positively

influence the share prices of the companies involved. For example, BC

Iron’s market cap gained 74% in the month of June 2009,

immediately after announcement of its Pilbara JV with Fortescue.

The need for infrastructure to support iron ore mining has led to the formation of company alliances. The Pilbara-based NWIOA member companies are Atlas Iron (ASX:AGO), Brockman Resources (ASX:BRM), BC Iron (ASX:BCI) and FerrAus (ASX:FRS). GIOA member companies are Crossland Resources (50% Murchison, ASX:MMX). Gindalbie Metals (ASX:GBG), Golden West Resources (ASX:GWR) and Asia Iron Ore Holdings. Other iron ore alliances could form, e.g. in South Australia, where lack of a suitable deep water port has been hindering development of the iron ore industry. A firm agreement over infrastructure access can be company-making for iron ore juniors.



Map of Pilbara rail network and North West Iron Ore Alliance (NWIOA) projects: FMG built the Cloudbreak line partly because of difficulty in accessing BHP’s Newman line, which it

largely parallels. BC Iron and Atlas have each negotiated access to FMG’s line, which links to Port Hedland (where a two-berth expansion is being considered).



Map of planned mid-west WA infrastructure and Fe projects of the Geraldton Iron Ore Alliance (GIOA): The Oakajee Port and Rail network has reached the advanced stages of planning and could be operating in 2013. Potential rail links include one to the

north east, from Oakajee to Jack Hills via Weld Range, and another running east -south east.

iron ore: price fundamentals - rc...

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