Small iron ore plays to get a boost from big miner’s cash shower

Showers of cash from the big boys of iron ore over the next few weeks will increase investor interest among smaller players in Australia’s most profitable mining industry (reports Tim Treadgold on Small Caps).
16th July 2021
Resources Rising Stars

BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals (ASX: FMG) are expected to unleash monster dividend payments when they report half and full year profit results inflated by record prices for the steel-making material.

With this positive news for shareholders in the leading producers of a mineral which refuses to retreat below US$200 a tonne (despite repeated forecasts of a fall), there will also be a flow-on effect as investors hunt for the next crop of winners.

There is a risk for late arrivals at the iron ore party if prices do fall after a three-year boom, but the stocks most at risk are the existing producers, whereas small producers and explorers have not seen their shares over-inflated by yield hunters.

But there is also an upside risk that the price of iron ore will remain elevated for longer than it has in earlier cycles thanks to the unique features of strong global economic growth in the wake of the COVID-19 slowdown and continuing shortfall in supply, especially from Brazil.

Credit Suisse, which had forecast a fall in the benchmark price for high-grade ore (62% iron content) to US$149/t, last week lifted its price prediction for the rest of the year to US$179/t because steel demand, especially in China, continues to exceed expectations.

“Into 2022, we believe the global iron ore market will remain reasonably tight and upgrade our forecasts to US$179/t from US$149/t this year and to US$144/t from US$120/t next year,” the investment bank said in a note headlined “Still going strong into 2022”.

The challenge for investors with an interest in iron ore is that news flow from the sector is dominated by the major producers leaving the emerging players on the sidelines despite several having solid stories to tell, such as:

Fenix Resources (ASX: FEX) may be small but has a significant advantage over most other iron ore producers.

Fenix produces high grade ore which attracts a premium above the already inflated benchmark price. A glimpse of what grade means in iron ore was contained in Fenix’s June quarter production report released earlier this week in which the company said it shipped 281,000 tonnes of ore, at an operating margin of A$127 a tonne.

When added to Fenix’s first shipments earlier this year, the June quarter exports from its Iron Ridge mine in the Mid-West of WA, mean the business has sold 500,600t of 62.5% ore in four-and-a-half months to generate a handy $66 million in cash.

Though it has a modest resource of just 10.5Mt of ore, Iron Ridge will have a short but profitable life with its cash funding work on expansion options such as the Ulysses deposit and Iron Ridge Extended.

A strong balance sheet means Fenix’s board is already talking about capital management, code for a share buyback, which helps explain why the company’s share price has moved up sharply over the past six weeks, adding $0.13 (46%) to $0.41.

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