BC Iron Limited (ASX: BCI) reported a huge loss and further asset impairments in what is becoming typical for the resources sector this reporting season.
Despite a 55% increase in shipped ore, revenue collapsed by 40% to $281 million resulting in a net loss after tax of $158 million. After adjusting for impairments and other costs, the "underlying net loss" was $43 million.
The company booked $170 million of impairments across its assets due to lower commodity prices which reduce the expected future value of these assets.
BC Iron Managing Director Morgan Bell said, "The 2015 financial year was challenging from both an operational and financial perspective. However, we have emerged with a materially lower cost base."
Mining operations at its primary Nullangine mine were affected during the first five months of the year due to issues with "sticky clay" which caused C1 cash costs to climb from $52 per tonne up to $69 per tonne. BC Iron confirmed that the issue was resolved and cash costs are now around $47 per tonne.
Operating cash flow for the year was negative $33 million and proves there is a lot of work to do before turning a profit when the iron ore price sits around US$50 per tonne.
BC Iron paid off around US$45 million of debt during the financial year and cash reserves fell by $90 million to $68 million. The company will be debt free after one final US$5 million payment due in December 2015.
Earlier in the year BC Iron released a statement saying it "will continue to implement further cost saving initiatives, including a potential decrease in near-term strip ratios through deferral of higher strip ratio areas". For those not familiar with mining terminology, this involves changing the mine plan to target the highest grade, lowest cost ore today. This increases the future cost of mining and will usually decrease the mine life. Many struggling mining companies around the world are probably doing the same thing.
FY16 guidance was for total iron ore shipments of around 9 million tonnes at an all-in cash cost between A$48 and $54 / tonne. If BC Iron can continue to cut costs and improve its operational performance it may surprise investors with a small underlying profit in FY16.
Mining companies are rapidly cutting costs, however, the expected influx of additional iron ore from new projects coming online and lower demand from China is likely to suppress iron ore prices and reduce any profits within this industry for the foreseeable future. Investors would be wise to avoid this sector until there is a brighter outlook.
