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Junior miners bring abandoned iron ore projects back to life

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Six years after a once-in-a-generation commodities crash forced Noble Group to close the Frances Creek iron ore mine in remote northern Australia, its new owners are restarting it.

Darwin-based NT Bullion is among a host of junior miners from Australia to Canada that are resuscitating operations abandoned by larger producers of the steelmaking ingredient.

Their bets made at the bottom of the mining cycle could prove lucrative. The price of iron ore surged 65 per cent last year to a nine-year high of $166 a tonne on the back of sustained strong demand in China and supply constraints in Brazil, the world’s second-biggest producer.

“At current prices, it gets close to a $100 per tonne margin for us,” said Rodney Illingworth, managing director and co-founder of NT Bullion.

Analysts forecast prices to remain above $100 a tonne in 2021 with the four largest producers — BHP, Rio Tinto, Vale and Fortescue — unable to significantly expand production. After that, they expect prices to fall back with Brazilian supply recovering faster than global steel production.

NT Bullion bought the Frances Creek mine in 2020 from Perth-based Gold Valley Holdings, which acquired it from Noble for A$1 in 2018. It is investing A$15m ($11.3m) to upgrade equipment, process ore from existing stockpiles and begin mining. The first trains of iron ore left for Darwin port in December and are due to be shipped in January under a marketing deal with Anglo American.

A few hundred kilometres away, operations have also restarted at Roper Bar, a mine bought in 2017 by British Marine Group subsidiary Nathan River Resources that now has an annual production target of 1.5m to 2m tonnes of iron ore per year. Nathan River has a marketing deal with Glencore.

“You certainly see a correlation between high iron ore prices and expanding output from junior miners outside the big four producers,” said Paul McTaggart, commodities analyst at Citigroup. “Juniors will look to restart mothballed mines and bring some marginal tonnes back on to the seaborne market.”

Citi Research shows non-traditional iron ore supply (from nations other than Australia, Brazil and South America) to China fell from 206m tonnes in 2013 to 109m tonnes in 2015, when average iron ore prices crashed from $97 per tonne to $56 per tonne. This year Citi predicts non-traditional supply will jump back up above 200m tonnes, as average prices hit $120 per tonne.

But Mr McTaggart believes there is a limit to any further expansion of non-traditional iron ore supply unless a China-backed consortium and Anglo-Australian miner Rio Tinto commit more than $20bn to develop their respective share of the huge Simandou deposit in Guinea.

“This is a complex project involving 650km of railway through difficult terrain that could provide up to 200m additional tonnes per year,” he said, adding that it would take a least six years before production at Simandou could begin and a decade or more to reach full production.

Another beneficiary of the iron ore price surge is Champion Iron, an Australia-listed producer that bought the mothballed Bloom Lake mine in Canada’s Quebec in 2016 for C$10.5m ($8m). The previous owner, Cliffs Natural Resources, spent $7bn acquiring the mine in 2011 and building infrastructure over five years.

“Look at what happens when the herd mentality sets in and most analysts and investment bankers say iron ore prices are going to x and staying there forever,” said Michael O’Keeffe, Champion’s founder and executive chairman. “I like to take countercyclical views.”

Mr O’Keeffe, a metallurgist by training and former managing director of Glencore Australia, is known in the industry for building up Mozambique-focused Riversdale Resources, which Rio bought for $4bn at the peak of the mining boom in 2011 before selling it for just $50m during the commodities crash a few years later.

With the financial backing of Glencore, the Quebec government and Chicago fund Wynnchurch, Champion restarted mining in February 2018 and produced 7.9m tonnes in its first year of operation. It is planning a C$500m expansion to double production to 15m tonnes a year by mid-2022, which it says would cut production costs from $40 to $35 per tonne including shipping.

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Champion forecast long-term sustainable iron ore prices at about $85 per tonne in its expansion project feasibility study. Its high-grade output fetches a premium over the benchmark iron ore price.

“We’re getting $166 to $167 per tonne,” said Mr O’Keeffe. “I mean, that allows us to just print money. But that’s not going to always be there and our decisions are not based on today’s price. It’s more about how we see the market going.”

He said Brazil would struggle to increase production rapidly in the short to medium term because of the pandemic and fallout from recent mining disasters, while Australia lacked spare capacity at existing high-grade projects. His longer-term goal was to expand output to “somewhere between 28m and 30m tonnes a year of high grade”.

For now, the stars are aligned for smaller producers to reap outsized rewards from their investments. But they need to move quickly.

High prices are now providing a strong incentive for new mine development expansions across many commodities, including iron ore where the supply discipline of the major producers may not last for ever. Iron ore demand could also be threatened by a faster uptake of scrap in China’s steelmaking industry.

“Elevated iron ore prices over the last two years have resulted in increased project activity — we’ve identified over 340m tonnes per annum of growth projects, with an average incentive price of $51 a tonne, vs a pipeline of 230m in 2019,” Morgan Stanley said in a recent report.

Still, the junior producers expect to remain profitable even when prices fall.

“We didn’t project this price and we would be fine even if prices fall to $55 per tonne,” said NT Bullion’s Mr Illingworth. “But it is certainly an added bonus.”



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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