When Atlas Iron Limited (ASX: AGO) announced that it would suspend its operations last week, it should hardly have come as a surprise. In wake of the latest crash in iron ore prices, it was always going to be just a matter of time before one of our junior miners (whether Atlas Iron or another high-cost operator) was forced to shut down its mines.
In fact, with iron ore having plunged below US$50 a tonne recently, it should be surprising that more junior miners haven't been forced to do the same thing. While BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), and to a lesser extent, Fortescue Metals Group Limited (ASX: FMG), are the obvious exceptions, most of Australia's miners may be operating at a loss in this low price environment.
While some analysts consider Mount Gibson Iron Limited (ASX: MGX) to be the best placed junior miner to withstand the recent crisis, in part thanks to its decision to close its Koolan Island operations late last year, several others could be in trouble.
By all accounts, BC Iron Limited (ASX: BCI) could be one of those miners. Although it recently said that it had finished the March quarter with $107.5 million in cash, and that it had made considerable progress in reducing its overall costs, it is unlikely to be operating at a profit at these price levels. As such, it could burn through that cash balance quickly unless it elects to suspend production in Western Australia, just as Atlas Iron has.
Of course, if there were signs of a strong rebound in iron ore prices in the foreseeable future, it would be a completely different story. But most analysts are expecting the price to drop further, possibly into the US$30s a tonne range. Should that scenario play out, we're likely to see plenty more junior miners around the world hit the wall, hard. As such, investors would be wise to stay clear of the miners altogether.
