Low-grade iron ore tipped for revival as steel prices soften

6th April 2018
Resources Rising Stars

Cobalt stocks led the way up in a short week on the ASX but the more interesting issue which is yet to be picked up by investors is the potential for a sea-change in iron ore, where the sell-off in low-grade producers could be coming to an end.

While not yet a common view, the iron ore shift was detected by analysts from Deutsche Bank during a visit to the Chinese steel industry – where a switch away from high-priced ore assaying 65% iron (and more) to 58% iron (and less) appears to be underway.

The detail of the research lies in a Value-in-Use (VIU) calculation which looks at the profit a steel mill can generate from using cheaper iron ore such as that produced by Fortescue Metals Group (FMG).

According to Deutsche Bank, a mill using 58% iron ore can today make an extra $US16 a tonne on reinforcing bar (rebar) used in the construction industry instead of the high-grade material produced by industry leaders such as BHP and Rio Tinto.

As rebar prices fall in China, which they are, there will be a greater incentive to switch the iron ore grade to lower quality material, the bank said.

Interestingly, Deutsche Bank’s VIU analysis occurred at roughly the same time Fortescue’s share price touched a 12-month low of $4.20 – a price which is a hefty $1.30 less than the bank’s target price for FMG of $5.50.

At the close yesterday, FMG had crept back to $4.22, down 17c over the week.

“Our China trip and the VIU model both show a switch back to 58% iron ore is underway,” Deutsche Bank said.

Weaker prices were a feature of the week with more stocks hitting 12-month lows than highs, which could be pointing to significant change in underlying sentiment as uncertainty flowing from the threatened China v U.S. trade war rattles confidence.

An outstanding exception to that observation was Cobalt Blue, which is developing a strategic partnership with the big Korean manufacturing group LG at its Thackaringa cobalt project near Broken Hill in NSW.

Over the week, Cobalt Blue added 28c to $1.53, but did hit a 12-month high of $1.66 in early trade yesterday (Thursday).

Nzuri Copper was another cobalt-exposed stock to move higher as interest grows in its Kalongwe project in the Democratic Republic of Congo. Over the past four days it has added 3c to 35c, taking its gain over the past three weeks to 9c.

Overall, the Australian market was largely captive to international events which caused commodity prices to see-saw as talk of a trade war ran hot and cold.

RBC Capital Markets circulated an upbeat assessment of the situation, advising clients to “stay the course during this period of light turbulence”.

Top of the Canadian bank’s recommendations were gold stocks, with the leading Australian miners on the buy list being Dacian Gold, Saracen and Resolute, while Glencore was the pick of the big diversified miners.

Other price moves and newsworthy events during the week included:

  • Duketon Mining enjoying a 4c boost to 30c after St Barbara took a 12.3% stake in the gold explorer via a $4 million placement. Good news as that was for Duketon it was not popular with St Barbara shareholders, who wrote its share price down to $4.02, a fall of 17c.
  • Gold Road was one of the stronger gold stocks during the week, adding 3c to 84c after announcing the start of a $23 million exploration surge at its flagship Yamarna project in WA.
  • Perseus got off to a flying start when the market re-opened on Tuesday, trading up to a 12-month high of 49c, at which point lethargy set in and the stock slipped back to where it started at 47c. Interest in Perseus has been heightened by the start of commercial gold production at the Sissingue mine in the West African country of Ivory Coast. Analysts at UBS reckon the stock is heading for 55c.
  • Dacian enjoyed a very modest price uptick on news of the first gold pour at its Mt Morgans mine in WA, rising by 1c to $3.11 as it heads for the status of 200,000 ounce-a-year producer over a mine life of at least 10 years.
  • Orion Minerals edged up by 0.6 of a cent to 4.6c after reporting the granting of prospecting rights to a strike extension of its Prieska zinc and copper project in South Africa.
  • Myanmar Metals eased by 0.2c to 5.8c despite a speculative buy tip from Perth stockbroker Argonaut, which described the company’s Bawdin silver-lead-zinc and copper mine in Myanmar as the world’s best under-exploited polymetallic project. The broker tipped a 12-month price target for the stock of 25c.
  • Altura led a generally weaker lithium sector with a 3c slide to 41c, despite announcing the appointment of Citigroup as corporate adviser to a potential change of control transaction. Galaxy was 28c weaker at $2.90.
  • European Lithium was an exception to the weaker overall lithium trend, adding 2c to 24c after finalising a positive pre-feasibility study into its Wolfsberg project in Austria.
  • Barra Resources added 0.3c to 5.3c after updating the market on the company’s exposure to the cobalt market at its Mt Thirsty project near Norseman in WA.
  • Helix Resources reported a high-grade copper intersection at its Collerina project in NSW, with a best intersection of 5 metres at 4.3% copper from a depth of 316m. On the market, the stock added 0.2c to 4.2c but did get as high as at 5c early yesterday.
  • Battery Minerals reported more high-grade drilling results from its Montepuez graphite project in Mozambique. The best drill hit was 37m at 13.49% total graphitic carbon (TGC). On the market, Battery slipped 0.7c lower to 7.3c; and
  • Tawana Resources went into a trading halt when it revealed plans to raise $20 million and merge with Singapore-based Alliance Mineral Assets. The deal would bring the Bald Hill lithium project in WA into a single business, as a first step to expanding production.

 

 

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