The long term forecasts for spot iron ore are undeniably...

The long term forecasts for spot iron ore are undeniably convoluted. On one hand we have the diehard bears calling for $60/t in 2015, and then there are the optimists in this article suggesting that prices could sit around the $120/t mark in 3-4 years time.

Which ever way you see things headed, prices are destined to fall, and there is a growing consensus to move away from iron ore juniors because they won't be able to turn a profit at the mine when they start producing in the middle of this decade. That theory might hold true for the likes of PLV which I believe is forecast to produce at $70/t+ for their DSO operation, but I think that CAP will largely be unscathed from any fall out in spot prices.

Allow me to explain...

The spot price of magnetite concentrate fetches a premium of approximately 25% to that of iron ore fines (give or take a few % depending on absolute product grade); so we have a long term forecast for mag conc ranging anywhere from $75/t to $150/t. Personally, my instincts suggest that iron ore prices won't perform as poorly as the bears suggest, with many companies currently not meeting the developmental targets that analysts are assuming being met in their forecast models of $60/t iron fines. For example, the likes of MMX are running into some highly publicised problems, and BHP's RPG5 ramp up has already been delayed by one year with it now pushed back to late 2013 at the earliest. Then we have Vale's Serra Sul ramp up running into some environmental issues. Just these three problems account for a shortfall of approximately 50MTpa in potential shortfall from company targets in 2013-2014, and these have been largely unaccounted by those forecasting such a lowly outlook for iron ore. Supply downgrades are not limited to these three examples, with Anglo also facing environmental issues in Brazil, which is pushing back progress at their 26MTpa Minas Rio prospect by 18 months. In other words, while the most bearish of iron ore bears are projecting a seaborne supply surplus of ~150Mt in 2015, it is highly likely that this surplus will be no where near as high. In fact, if recent work undertaken by UBS is anything to go by, the seaborne supply surplus might only be 40Mt in 2015, 75% lower than that forecast by many other analysts. In lieu of this, their outlook for IO fines is as follows:

Ultimately, spot magnetite concentrate is likely to remain well and truly above $100/t throughout this decade, which should allow CAP to be a very profitable producer. This theory is echoed in the Hawsons PFS where the LT forecast price is $103/t if I recall correctly. If we model future revenue on this long term price, then the figures are very impressive for this project.

Indeed the biggest problem for CAP is not the long term outlook for iron ore, in fact its hardly going to be a problem at all. The major milestone for this company is going to be obtaining finacing, whether it be via the JV agreement with BMG where we are free carried, or if we line up a JV with a company that is more capable, it remains to be seen. Are we going to be a failure like MMX, or a success like GRR? That's the million dollar question!