Great article in the WA today re the importance of grade......
Once the engineering risk of the KI rebuild dissipates, and the focus turns to mining of 64-65% high grade IO at Koolan, i'm pretty confident you will see a much higher sp for MGX.
Patience is required.
Shake-out looms for WA iron ore as China cleans up
Stuart McKinnon
Wednesday, 8 November 2017 11:03AM
WA mining veteran and former Rio Tinto executive Mal Randall believes WA’s iron ore sector could be set for a shake-out because of China’s growing demand for high-quality ore and diminishing grades across the State’s remaining deposits.
China’s recent crackdown on pollution has forced inefficient steel mills to close and remaining mills to use higher-grade ore to cut their emissions and boost efficiency and output to compensate.
This, in turn, has seen discounts for lower-grade ore blow out from 10-15 per cent to 25-30 per cent and even 40 per cent. Meanwhile, higher-grade ore is commanding a significant premium. Generally, the lower the grade of ore, the higher the level of impurities such as phosphorus, silica, sulphur and alumina, which requires more energy for blast furnaces to “slag-off”, generating more unwanted emissions.
Mr Randall said the game had changed significantly in the iron ore game and that “grade is king”.
He predicted some miners would soon have long-term issues with the quality of their ore.
“Unless some of the more marginal players can find some sort of silver bullet to lift grades and lower impurities, they’re going to be in trouble,” he said.
Mr Randall said there were Pilbara deposits being mined today that wouldn’t have been touched 40 years ago because the grades would have been considered too low.
He noted Rio Tinto’s recent foray into the West African nation of Guinea to pursue the Simandou project was all about a pursuit of higher-grade (65 per cent) ore.
Mr Randall, who is a director and shareholder in Australian Securities Exchange-listed Magnetite Mines which is focused on developing a magnetite project north-east of Adelaide, said processing magnetite ore to produce a 64 per cent plus product was one way to bridge the grade gap.
However the additional processing costs required for magnetite could make its production unviable. Both CITIC’s Sino Iron project in the Pilbara and Ansteel’s Karara project in the Mid-West have struggled to operate profitably.
Despite this, the growing grade-price gap is forcing Fortescue Metals Group to seriously consider the economics of its higher-grade Iron Bridge magnetite joint venture project south of Port Hedland. The company expects to make a decision on the project next year.
FMG, which produces a 58 per cent product with low impurities, is somewhat sheltered from the discount for lower-grade ore because of its low operating costs. However investors reacted with some concern last month when the company revised down price realisation forecasts for its ore from 70 and 75 per cent of the benchmark price to 75 to 80 per cent because of the widening discount for its lower-grade ore.
The company’s outgoing chief executive Nev Power said Fortescue’s investment in beneficiation and blending of its ore was critically important to its long-term sustainability and competitiveness as a supplier of iron ore.
“We are always looking at how we can fine tune our product strategy to maximise the value of our ore bodies and infrastructure assets,” he said.
He believed the prevailing discounts for lower-grade ore were the result of high steel margins, coking coal prices and seasonal production cuts driving up the premium on higher-grade ores.
“Iron ore markets have always been cyclical and our view is that this will continue in the future.
“In the longer term, as market conditions normalise, we expect that steel mills will look to reduce their cost base by using higher value-in-use iron ore,” he said.
A Credit Suisse research report on FMG last week agreed the low-grade discount was more likely to be cyclical and retained a price target of $6.10. However speaking at the Asia-Pacific Regional Conference in Perth at the weekend, Mr Power said the company was looking to export markets outside of China, including Europe and countries in South Asia, where the discount for lower grades was not so wide.
Mineral Resources boss Chris Ellison last week noted the discount for lower-grade ore was more likely to be permanent than cyclical. However MinRes is less exposed to iron ore because of its diversified operations which include processing and lithium mining businesses.
Iron ore analyst and former Rio Tinto and FMG executive Philip Kirchlechner agreed the “really good stuff” in the Pilbara was either gone or depleting and customers were being forced to live in a world of lower grades.
But he was more confident that underlying demand for iron ore out of China, with imports set to top one billion tonnes this year, would sustain a strong market for miners of varying quality ore.
US iron ore miner Cliffs Natural Resources recently said its WA iron ore operations, which export 11Mtpa of 58 per cent iron ore through Esperance, would struggle to break even this year because of the discount for lower-grade material.
In a note to investors last month, Macquarie Research said quality had become too important for investors to ignore when seeking exposure to the iron ore market.
But it expected premiums for higher grade, lump and pellet products to soften from current levels.
Atlas Iron boss Cliff Lawrenson last month said the discount for lower-grade ore had continued longer than he had expected but he insisted there would always be a market for the company’s product.
Both Rio Tinto and BHP have noted the premium they receive for their respective 62 per cent Pilbara ore, with both suggesting the price spread is more likely to be structural than cyclical.
Rio boss Jean-Sebastien Jacques noted the spread in prices at the opening of the company’s Silvergrass mine in August and suggested a restructuring was taking place in the iron ore market.
He spoke of the company’s focus on grade and quality in its iron ore business and “value-over-volume” approach. But more recently he has advised staff in an internal memo that the company should be pushing for 400Mtpa from its Pilbara operations, a big jump from the 330Mtpa it expects to ship this year.
Roy Hill managing director Barry Fitzgerald told a WA Mining Club lunch recently that every iron ore player in the Pilbara needed to be focused on the grade of its material.
He said the company would look to beneficiating circuits to boost the grade of its sub-62 per cent ore.
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