I'm sure some investors with significant stakes in Arrium Ltd (ASX: ARI), Atlas Iron Limited (ASX: AGO), and BC Iron Limited (ASX: BCI) will vigorously defend their shareholdings, but could it be that these junior miner simply don't matter?
Iron ore for immediate delivery to the port of Tianjin in China closed at US$54.82 on Friday, well above its recent low of US$46.70 but still a long way from the US$120 from only 12 months ago. The price has seemingly jumped off the bottom as a result of Atlas Iron Limited suspending production and BHP Billiton Limited (ASX: BHP) delaying its ramp-up of iron ore output from 260 million tonnes per annum (mtpa) to 290 mtpa by a couple of years.
Junior miners don't matter
In the most recent quarter, Arrium shipped 3mt, BC Iron shipped 1.5mt, while Atlas planned on shipping 3.5mt had things not gone pear shaped. So combined, these three companies would have shipped 8mt for the quarter or 32mtpa at full steam.
BHP is planning on adding 30 mtpa through mainly operational efficiency, Gina Rineheart's Roy Hill will start shipping 55mtpa from late 2015, and Rio Tinto Limited (ASX: RIO) will ship 350mpta this financial year compared to just 233mpta last year! The volume of ore shipped by the three juniors is so small compared to the big firms that their contribution can be easily replaced or forced out of the market during a period of low prices.
What about Fortescue?
Fortescue Metals Group Limited (ASX: FMG) is planning to ship 160 to 166mt of iron ore this financial year at a production price well above that of BHP, Rio Tinto, and most likely Roy Hill. Market commentators have speculated that Roy Hill could have production costs closer to Fortescue, as they both have similar-sized debt loads (~$7 billion net).
What's the point?
While I understand the appeal in investing in Australia's junior iron ore miners, I simply couldn't invest in anything smaller than Fortescue. And if I hadn't been a holder for quite some time I doubt I would buy at today's price either, the risk of loss in another market crash is too high!
