This year started out with continued strength in iron ore prices and related mining companies kept up their plans to get as much ore onto export ships as possible. They want to take advantage of higher spot prices and avoid a possible supply glut that all of their expansion projects combined are fueling.
Commodity businesses have to work with the spot prices that are set by world markets, so they can usually only control their processing volumes and related costs. Currently, the growth in supply is growing at a faster pace than expected demand and that may lead to lower prices, possibly breaching US$100/tonne.
China has announced it will be boosting infrastructure development for roads, railways and other social infrastructure as it deals with massive urbanisation projections over the next few decades. This will also be an economic boost for the country. Commodities demand may rise, which would benefit Australia since over 70% of the iron ore exports from Port Hedland are headed to China.
The mining pullback and the weakness in other commodities is leading BHP Billiton Limited (ASX: BHP) to consider selling off less profitable divisions outside of iron ore, coal, petroleum and copper. This could also lead to those divisions being combined into a separate spin-off company.
Either way, profit margins and returns on equity and investment may improve and could lead to a stronger, leaner balance sheet. Both prospects could raise the value of the company.
Atlas Iron Limited (ASX: AGO) recently announced that it will expand production at its Mount Webber mine with its stage two development. It expects that by the end of the December 2014 quarterly production capacity should be around 6 million tonnes a year.
In addition, the life of mine operating costs should be lower than first estimated, in the range of $49-$51 per wet metric tonne (WMT).
In the first half of FY2014, revenue was 104% higher than 1H FY2013. Since 2010, revenue has increased steadily, but underlying net profit has been up and down. Interim underlying net profit was $61.2 million, up from a $10.4 million loss in the previous corresponding period.
Its share price has stabilised around $1 after trending down from $4 in 2011. Its PE is 9 and it has a dividend yield of 2.9%.
Foolish takeaway
Investors in iron ore miners should keep up-to-date on Chinese economic growth and further stimulus packages. The country has to plan for more urbanisation and expansion of the domestic economy, so iron ore miners can benefit from increased demand over the long run.
