An article in Fairfax media this morning offered an interesting look at Australia's iron ore miners, including just how few of them are making a profit at today's prices.
In recent days, iron ore has fallen as low as US$44.59 per tonne, before rebounding to US$48.99 last night. Iron ore miners have moved completely independently of ore prices however, with Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) actually rising on Thursday after a 10% decline in prices Wednesday night.
Based on Fairfax's figures (which were taken from company reports and UBS analyst estimates), it looks as though only two or maybe three miners are actually turning a comfortable profit today:
| Company | All-in break even cost (including interest expenses)* |
| BC Iron Limited (ASX:BCI) | US$51/dmt |
| Atlas Iron Limited (ASX:AGO) | US$51/dmt |
| Arrium Ltd (ASX:ARI) | US$51/dmt |
| Mount Gibson Iron Limited (ASX: MGX) | US$49/dmt |
| Grange Resources Limited (ASX: GRR) | US$49/dmt |
| Fortescue Metals Group Limited (ASX: FMG) | US$44/dmt |
| Vale SA (Brazilian; world's largest iron ore miner) | US$43/dmt |
| Roy Hill (Gina Rinehart) | US$41/dmt |
| Rio Tinto Limited (ASX: RIO) | US$30/dmt |
| BHP Billiton Limited (ASX: BHP) | US$29/dmt |
*US dollars per dry metric tonne (dmt), at 62% Fe (iron) content equivalent
It's uncertain precisely how accurate these figures are; for instance, several other sources list Rio Tinto as having a lower all-in cost than BHP Billiton. More certain, however, is the fact that each of these producers is cutting costs as rapidly as they can in order to prop up their cash flow.
Fortescue has asserted that its costs will be comparable to BHP and Rio Tinto before long, although many analysts feel that not all of the cost cuts are sustainable.
The first thing to disappear during lean economic times is the budget for capital expenditure and exploration, which might save money in the short term but ultimately leads to shorter mine life and a poorer long-term future.
An even bigger concern is a forecast slowdown in Chinese demand. The value of iron ore before China's construction boom was lower than it is today, worth around US$30 per tonne. With the Chinese economy slowing and no sign of other buyers to take up the slack, I feel that there is simply no catalyst for higher ore prices in the near to medium term unless a number of miners quit the market.
While BHP and Rio Tinto executives are justified in saying that the long-term outlook for iron ore is bright, that's only true if you're invested in a company with manageable levels of debt and a low production cost…Like BHP or Rio Tinto. The risks with other producers are simply too high and the near-term rewards too low in my opinion for other investors to take the risk.
