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Quirks of the market buoy big iron ore players

 Iron ore was trading at relatively healthy levels around $US70/t at the beginning of 2019, but a deadly tailings dam tragedy in Brazil was about to turn the market on its head.

Brazilian iron ore giant Vale was forced to suspend several operations after an upstream dam at its Corrego do Feijao mine failed, killing more than 200 people.

It was the second deadly tailings dam failure in the country in three years, following the collapse of the Samarco dam, a joint venture between Vale and BHP, in 2015.

The mine closures initially knocked out about 90Mt from the global seaborne trade but Vale has since resumed some operations to bring that figure down.

The supply gap had already triggered price increases when Australian supply was disrupted by Tropical Cyclone Veronica, which swept across the Pilbara coast, dumping heavy rains and knocking out vital infrastructure.

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Both Rio Tinto and BHP were forced to lower their full-year guidance as a result.

Meanwhile, Chinese steel production has continued at record levels of annual run rates of up to one billion tonnes.

The market fundamentals have been a boon for all iron ore players, but none more so than Fortescue Metals Group.

The Andrew Forrest-controlled miner avoided the worst of the cyclone-related damage sustained by its bigger Pilbara competitors.

But another quirk of the market has also played into its hands.

Shrinking margins for steel-makers in China has meant its predominantly lower-grade ore has become more sought after.

The trend has meant the discounts it had been forced to accept for its product have narrowed considerably on the benchmark 62 per cent price.

Fortescue revealed in April it had secured a staggering 47 per cent price rise for its ore in the March quarter to $US71/t.

The company also revealed that 10 per cent of the quarter’s shipment came in the form of its new West Pilbara fines product, which trades at a premium to its other ores because of its 60.1 per cent iron content.

Fortescue’s share price has more than doubled since the start of the year as a result of the market forces working in its favour. The company also approved development of its $US2.6 billion Iron Bridge magnetite project near Port Hedland in April.

The project is expected to produce its first high-grade magnetite concentrate by mid-2022 and ramp up to 22-million-tonnes-a-year capacity within 12 months.

Last month, the company turned the sod on its $1.8 billion Eliwana iron ore project in the Pilbara, that will underpin its West Pilbara product and begin the process of opening up its vast footprint in the region to mining.

Delegates at the Diggers and Dealers Mining Forum will be looking to chief executive Elizabeth Gaines as to whether the company is planning another big dividend windfall when it announces its full-year results later this month.

Gina Rinehart’s Roy Hill will also again take a presenter’s slot at the conference this year, with chief executive Barry Fitzgerald to provide an update on the company’s efforts to expand its production beyond nameplate capacity of 55Mtpa to 60Mtpa.

Like its bigger competitors, Roy Hill is likely to have enjoyed record profits in the 2019-20 financial year as the price of iron ore sky-rocketed. A combination of higher prices and higher export volumes suggests the company will eclipse the $3.84 billion in revenue and $558 million profit it generated in fiscal 2018.

Whether the iron ore price remains at elevated levels and for how long is likely to be another key talking point at this year’s annual Kalgoorlie conference.

Analysts are roughly divided into the stronger for longer camp and those who believe the demand and supply fundamentals will adjust quickly to send prices lower.

Last month, Citi predicted a steel slowdown in China and a recovery in supplies would see prices fall to about $US95/t in the final quarter of the calendar year and to $US75/t over the next 12 months.

But Shaw and Partners senior analyst Peter O’Connor said in May the Vale outage would last not weeks, not months, but years.

“Iron ore will stay higher for longer than anyone had previously thought — this is an extended-duration event,” he said.

Another Pilbara iron ore player, Rio Tinto, will present at the 2019 Diggers conference for the first time since 2016.

The mining giant’s growth and innovation boss, Stephen McIntosh, will speak on behalf of the company’s exploration division.

Mr McIntosh is expected to make a pitch to juniors to partner with the company as it looks to ramp-up its exploration efforts in Australia and around the world.

Rio Tinto Exploration has been at the forefront of the recent buzz around the Paterson province in the East Pilbara, after discovering copper, gold and silver at its Winu prospect, north-east of Telfer.

The company sees copper as a strategic metal, revealing in May it was spending 53 per cent of its $US231 million ($329 million) global exploration budget on searching for new deposits of the metal.

The industrial metal, which has a host of applications, is expected to play a growing part in the electric vehicle revolution.

An electric car is estimated to contain about 85kg of copper versus 25kg for a traditional internal combustion vehicle.



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