Amid a slump in iron-ore prices, farsighted investors are eyeing cheap mining assets from Australia to Canada.
The slide in the price of iron ore and other commodities has hammered mining companies’ share prices, forcing many to shed assets and opening the door to other investors, including big institutions and private-equity firms with no mining experience but with time to wait for prices to rise.
Canada’s two largest pension funds—CPP Investment Board and Caisse de depot et placement du Quebec—are each seeking possible partners for separate bids for Rio Tinto PLC's RIO.LN +2.73% 59% stake in Iron Ore Co. of Canada, valued at about $4 billion, people familiar with the matter said last week.
The pension funds couldn’t immediately be reached for comment.
Others who have shown interest in the IOC stake include private-equity firm Blackstone Group LP BX -1.44%, people familiar with the situation said. Blackstone couldn’t immediately be reached for comment.
Meanwhile, Singapore-based commodities trader Noble Group Ltd. N21.SG -1.09% is considering a bid for Australian iron-ore miner Western Desert Resources Ltd. WDR.AU -5.38%, people familiar with the matter said last week. Western Desert has a market value of 235 million Australian dollars (US$214 million). Noble Group didn’t respond to a request for comment.
And last month, Japanese trading companies Itochu Corp. 8001.TO -0.24% and Mitsui 8031.TO 0.00% & Co. agreed to buy stakes in BHP Billiton Ltd. BHP.AU +2.00%’s Jimblebar iron-ore mine in Australia for a total of around US$1.5 billion. Itochu agreed to purchase an 8% stake in the mine for around US$800 million, while Mitsui agreed to pay around US$700 million for a 7% stake.
Mitsui declined to comment. However, the two companies said in a joint statement posted to Mitsui’s website last month that their investments in Jimblebar were part of efforts to increase iron-ore production capacity ahead of expected medium- and long-term increases in global demand.
“People are looking to buy cheap assets, so this is the perfect time, when the downside [in prices] is still there,” said Helen Lau, senior analyst at UOB KayHian in Hong Kong. “Investors are able to negotiate even cheaper prices with miners.”
Though iron-ore prices remain above a nearly three-year low reached in September, they have fallen 12% this year to $126.90 a ton, a decline of around 20% from the 2013 high hit in February.
Sliding prices for iron ore and other commodities have hit mining companies’ profits and share prices, prompting many to sell assets as part of efforts to manage debt. Shares of Rio Tinto are down 16% this year, while those of BHP Billiton BLT.LN +1.36% and Fortescue Metals Group Ltd. FMG.AU +1.71% have fallen by 10% and 25%, respectively.
Rio Tinto, Australia’s biggest iron-ore exporter by volume, has put the IOC stake up for sale as part of its plan to sell noncore assets after swinging last year to its first full-year loss. Fortescue has cut spending and jobs after last year’s slump in iron-ore prices forced it into emergency talks with lenders.
Still, major miners—including Rio Tinto, BHP and Fortescue—are ramping up production of iron ore in expectation of growing long-term demand, including in China, the world’s biggest consumer of iron ore. Rio Tinto said Tuesday, for example, that it achieved record iron-ore output in the second quarter of this year, and will decide by the end of the year whether to spend around A$5 billion to raise capacity.
Efforts by the major players to increase production have led to forecasts of a “wall of supply” hitting the market in 2014 and 2015—and with it continued price declines Credit Suisse CSGN.VX -0.37% projects iron ore to average $103 a ton, a decline of 19% from Tuesday’s prices, in the second half of this year and $96 next year, while Goldman Sachs GS -1.69% has forecast $80 a ton in 2015.
“It is a longer-term development story unfolding,” said Justin Smirk, senior analyst at Westpac Bank WBC.AU -0.51% in Sydney, adding that Australian iron-ore companies are relatively cheap.
Pension funds, known for investment horizons of 20 to 30 years, can wait for prices to rise and the sector to turn around, said Kelly Teoh, a strategist with IG in Singapore. “People are talking about the commodity super-cycle being over, but commodities will always have a place in society because, if you look at global population growth, we are reaching unprecedented levels”
— Rhiannon Hoyle in Sydney contributed to this article. http://blogs.wsj.com/moneybeat/2013/07/16/the-lure-of-cheap-mining-assets/
