One of Australia’s chief raw materials, iron ore is the largest export commodity our country produces, contributing around 5% to our GDP – and makes up nearly 20% of our entire export economy.
It should be no surprise then that our stock exchange is brimming with iron ore producers both large and small. The profitability of the commodity also means that many of these companies also often rank as some of the best dividend payers on the Aussie market as well.
That said, the companies themselves – and their profits – are also obviously highly dependent on pricing & demand for iron ore itself, and can see rapid swings in share price performance due to factors outside of their own control.
So which is the best iron ore stock on the ASX to buy? Here’s how we’d rank each of the best iron ore stocks on the ASX to invest in, along with some of the pros and cons of each for 2022.
Note these are just opinions based on a mix of financials & macro factors, and the iron ore industry as a whole is highly vulnerable to global policy issues that can change on a whim – especially in China.
Disclaimer: we do not hold any of these stocks at time of writing. This is a look at how the (profitable) ASX iron ore stocks compare to one another, and not on the outlook for iron ore as a whole vs. other investments.
The TL;DR version for those who prefer popup picture books:
(S-Tier in “tier lists” = the best)
The rankings & more detailed reasoning why:
1. Champion Iron (CIA)
Pros:
- Very high quality iron ore grades
- Located overseas, but no sovereign risk
- Focused more on growth than dividends
- Sustainability-focused business model; hydro for energy
- Looking to double production soon
Cons:
- Does not (usually) pay dividends if you’re seeking them
- Dividends paid are unfranked due to Canadian location
- Costs of extraction are “high” vs some of the cheaper producers
With many of the bigger names elsewhere within these rankings, why is it that Champion Iron (ASX:CIA) currently tops our list for the best ASX iron ore stocks?
There’s multiple reasons, but the first starts with one simple word: quality. There are multiple ways in which CIA’s quality as a business stands out from some of the others, and we’re not just talking about the “quality” of its iron ore – although that obviously plays a major role.
Ever since listing on the ASX back in 2007, Champion Iron have taken steps along the way not to take shortcuts.
This applies in terms of everything from the quality of their jurisdiction within the Quebec region of Canada, to the management & workforce they employ, to an emphasis on sustainable and renewable growth that now puts them in a highly future-proof position as we move into a “greener” world moving forward.
More than half of CIA’s energy consumption for its operations comes from renewable hydro power courtesy of its extensive investment in improving & fitting out its flagship Bloom Lake project over the past several years. This is not only better for the environment, but helps alleviate the impact of rising oil prices on CIA’s profit margins as well.
CIA’s ore itself also contributes to its “green” angle – the company produces extremely high grade ore at around 66.2% Fe (recently-reported average as per end of 2021).
This not only commands a price premium over lower grades, but is expected to become even more in-demand in the future due its lower emissions in the steel-making process.
This also ties directly into growing environmental concerns & government targets as the globe looks to edge closer to decarbonisation, with the steel industry otherwise a major carbon emitter.
“Ever since listing on the ASX back in 2007, Champion Iron have taken steps along the way not to take shortcuts.”
Its facility also comes equipped with its own railway to transport ore direct to loading port facilities nearby, cutting down on a lot of the drawn-out trucking costs & labour issues some of its Australia-based peers face.
As of their most recent figures, CIA produces ore at a cash-cost of $59.5 per ton of iron ore, and achieved an average realised sale price of $157.9 per ton; an excellent margin despite the relatively high cost of extraction.
With further studies underway to assess the feasibility of increasing its product to an eye-popping 69% Fe content, this premium could increase even more if it’s deemed to be economically viable.
Add in CIA’s near-term goal of doubling ore production volumes, and its share price looks even more undervalued to where it is as a business today.
Multiple exploration projects underway elsewhere throughout Canada (a country with no sovereign risk), a highly-desired quality ore product, plenty of mine life left, and a ton of cash at bank are the icing on the proverbial cake for CIA.
The only real “downside” outside of a lack of mineral diversification & ore price swings themselves is that – unlike the majority of its ASX iron ore peers – CIA is not typically a dividend-paying company.
They have focused on growth for the majority of their listed existence until recently, when the company decided to pay a small token dividend to shareholders.
However, most investors specifically select Champion over the other offerings because they don’t typically buy CIA for dividend payments in the first place.
It’s one of its main differentiating factors vs. the other iron ore miners as a stock; the company has proven they can generate investors better returns with the money given their proven growth trajectory – and given they’re a Canadian-based company any dividends they pay will be unfranked for Australians.
Lastly, being Canadian means that CIA is exempt from impacts of the often-contentious political relationships & boycotting between the Australian and Chinese governments that seems to be taking place more and more frequently, which helps alleviate that as a risk factor.
Combine all of the above, and CIA ranks as a highly fundamentally-sound pure-play ASX-listed ore stock that looks set to be more growth-oriented than many of its listed rivals.
2. Grange Resources (GRR)
Pros:
- Iron ore pellets guarantee a premium
- High-quality assets with integrated port for supply chain
- Most “fundamentally undervalued” of all the producing ASX ore companies based on ‘pure’ financials (at time of writing)
- Pellets desirability able to withstand drops in lower-grade iron ore demand
Cons:
- Perception of uninvolved board
- Erratic dividend payment history
- Some odd past investment/cash utilisation decisions by management
Another ASX iron ore company for which the quality of its product is the main calling card, Tasmania-based Grange Resources (GRR) also offers a point of differentiation to the rest of the miners on our exchange that helps it rank on the pointy end of the scale in our books.
With its main assets located in the north-west of Tasmania – headlined by its flagship Savage River open-cut pit mining operation – Grange extracts magnetite iron ore and then refines it into high-grade slurry, that is then piped & heated/transformed into ‘pellet’ form at its dedicated plant at nearby Port Latta.
This then allows the company to attract a price premium on their ore shipments due to fewer impurities & high grades, while the port’s shipping capabilities allow it to be transported directly to mainland Australia or (mostly) overseas while minimising land-based transportation costs.
Pellet premiums are added on top of the base iron ore price of already high-Fe content ore. With their most recent figures Grange of a $95.01 AUD per tonne cost, and an average sale price achieved of $206.80 AUD per tonne, Grange has become an absolute money-printer even with iron ore prices dropping down from previous all-time-highs recorded in 2021.
This is for material clocking in at an average Fe content of over 68%, which again is desirable not only for its quality in steelmaking, but for reduced emissions and energy consumption as well.
Grange has been producing quality revenue & profit figures for several years now, however for much of the past few years its share price stubbornly refused to catch up.
Ever since 2016 the company had been massively undervalued based on pure fundamentals vs. its industry peers; it sat around at a Price to Earnings ratio of around ~2, which even by Australian iron ore producer standards is low.
“It’s amazing what suddenly increasing dividend payouts by 5x can do for market sentiment.”
Much of this had been attributed to majority ownership of the company. Over 50% of GRR is owned by Chinese conglomerate Shagang International with a controlling interest obtained in 2008, who invested in getting the Savage River operation up to scratch and now have a streamlined operation in place for shipping pellets to the Chinese mainland.
The impression this gave to retail shareholders for several years was one of a detached board/ownership that did not place much of a concern on share price performance, and had a history of paying a pitiful dividend yield % vs. the massive amounts of cash the company was generating while iron ore prices soared.
However, recently (in February 2022) GRR experienced a major price re-rate after an announcement the company would dispense a heavy dividend payment to shareholders. Its share price jumped up as a result, and now sits somewhat closer to fair value versus its industry peers – amazing what suddenly increasing dividend payouts by 5x can do for market sentiment.
Even after this price adjustment, it could still be argued that Grange is still relatively undervalued particularly given the quality of its mine operations, remaining mine life, and potential for further expansion.
The company recently completed a Pre-Feasibility Study for Savage River that showed the expansion of underground mining operations would be viable, offering another 30% worth of mineral resources and the opportunity to extend mine life by an additional ~10 years.
This is in addition to the company having a 70% interest in the Western Australian Southdown project (has been under ‘strategic review’ for quite some time however), which is an asset that still has the potential to be developed into another premium ore hub down the track.
Add this to the fact the company is still sitting on over $450 million AUD in cash as of the end of 2021, has a remaining mineral resource of 497.5MT of high-quality ore, and has the ESG-influenced desirability of its pellets as a selling point as Chinese authorities aim to cut down on emissions as further positives.
All told, GRR still looks ‘up there’ as one of the Aussie iron ore stocks with the most near-term runway left in its share price.
3. BHP (BHP)
Pros:
- Commands great margins on its iron ore
- Has showed good levels of discipline/cost control
- Divesting itself of ‘non-ESG’ assets
- Widely diversified; alleviates some of pure iron ore price risk
Cons:
- So diversified it’s not really just an ‘iron ore miner’
- Carries a not-insignificant amount of debt
- Financial outcomes of potash projects not yet clear
The largest company in Australia has had a busy year in 2021-2022, with multiple notable corporate actions and analyst-beating earnings a highlight of the company’s recent calendar.
Originally established in Broken Hill in NSW and having been in operation for nearly 140 years, BHP is not merely an ‘iron ore miner’ and ranks as by far the most diversified mining company on this list.
Around 57% of BHP’s total revenue comes from iron ore, however projects for other materials such as copper (in particular), metallurgical & thermal coal, and nickel all form part of the company’s current portfolio. It’s also looking to add potash to the collection – courtesy of its upcoming Jansen project in Canada, the largest mine of its kind in the world – in the near future.
Historically, oil & gas has also formed a cornerstone of BHP’s operations however in 2021 the company announced the decision to merge these assets into Woodside Petroleum (WPL) and separate them off into a fully-independent company.
With the divestment of shares taking place in the second quarter of 2022, this allows BHP to score some additional ‘ESG’ brownie points and hopefully encourage more ethically-conscious investors.
The company has been making an ESG push in general, and is also aiming to divest its ownership of BHP Mitsui Coal by mid-2022, while setting net-zero emissions targets for 2050. Moving forward, BHP will now be judged fully on its mining operations, of which it has plenty: the business has projects in over 90 locations all over the world.
All this is to say, that an investment in BHP is the least-exposed of any here to the volatile fluctuations in iron ore pricing. Its diversity provides some level of insurance from what might otherwise cripple companies that are positioned closer to being pure-play producers.
While BHP can’t quite match rival Rio Tinto’s (RIO) sheer quantities of ore – BHP shipped around 250MT, and are aiming for a consistent production target of 290MT of ore, vs. Rio’s ~322 – it’s got a combination of other factors that help outweigh this.
Exposure to other materials, an ability to generate better margins, and greater geographic project diversity all combine to take some of the ‘concentration risk’ out of BHP as an investment. It’s large & diverse enough that it’s almost a “mining ETF” contained within a single company at this point.
Its Western Australian Iron Ore business is also a highly efficient operation.
With extraction costs of US $16.15 per tonne in 2021 (and forecast between US $17.50 and US $18.50 per tonne for 2022) and average sale prices of US $113.54 as of their most recent figures, BHP’s ore margins are excellent. This enabled them to ride the rise in ore prices to a likewise higher-than-forecast result as the year came to an end.
Profits from operations were up 50% as a result of cost performance enhancements and in large part to its iron ore business, but the company’s coal division also benefitted from recent massive price spikes, going from a net loss to a profit of several billion as coal prices surged.
“It’s large & diverse enough that it’s almost a “mining ETF” contained within a single company at this point.”
These combined to allow the company to pay a record interim dividend to shareholders at the start of the year, and provide around a 9% total annual yield at its most recent share price (at time of writing).
How sustainable this will be moving forward remains to be seen given the global (and BHP’s) intended pivot to renewables & the company’s efforts to divest these assets while they still have value. However it is also simply another example of how valuable the company’s diversity can be to the bottom line.
As with Rio, BHP are making a concerted effort to expand their portfolio of EV metals such as nickel and more copper. However, they’re looking to do this while spending less on iron ore as a proportion of cap-ex, with each additional project shifting the company away from being ore-centric one percentage point at a time.
Copper in particular remains a key focus, and while BHP is often perceived as an iron ore company, it really also ranks as one of the better copper investments available on the ASX.
Its average copper prices most recently achieved clocked in at US $4.31 per pound – close to historic highs – and it has acquired further interests in additional copper projects on the table in both the Northern Territory & Tanzania.
Rising nickel prices should also help BHP moving forward, and the company delivered its first nickel sulphate crystals from from its new Kwinana plant in WA in late 2021. BHP signed a supply deal with EV maker Tesla in July 2021, and expects the plant will produce 100,000 tonnes per year once fully operational.
In all, BHP could serve as a pretty ideal “one-stop-shop” stock for investors who are bullish on iron ore in 2022 but also don’t want to go all-in on the single commodity.
Its smart operations, EV ambitions and increased diversity likely make it “safer” (relatively) as an investment than any other option on this list – however it’s still subject to macro-economic factors such as Chinese demand and supply chain costs as all companies in the sector are.
4. Rio Tinto (RIO)
Pros:
- Extremely high-volume iron ore producer
- Exceptionally high dividend payer
- Recently achieved record financials
- Semi-diversified into other metals, but still majority iron ore
Cons:
- Has had some awkward recent cultural & legal mishaps
- Will be allocating quite large cap-ex $ in 2022
- Performance more constrained by mid-tier iron ore demand volumes
The world’s largest iron ore producer by volume, dual-listed Rio Tinto is one of the two “big boys” on this list with such a massive market cap that might indicate at first glance that there may not be much growth left in the beast. This is especially true when looked at on a %-returns basis compared to some of the smaller-cap iron ore miners featured here.
While that may be partially true for its iron ore assets – RIO derives about 80% of its total revenue from iron ore – the company has been embarking on a concerted mission to add a much heavier concentration of other minerals to its holdings.
Minerals are a massive industry, and RIO is a massive operation, with projects spanning over 30 countries and a portfolio that is iron ore-heavy, but also contains copper, gold, aluminium, uranium and more.
Yet, while the company has continually grown via mergers and acquisitions all over the globe throughout its near-150 year history, it’s still pumping out vast quantities of iron ore that remains its main cash cow in the present day.
The company shifted and sold a cool 322 Mt of iron ore from the Pilbara region of Western Australia in 2021, which was a leading contributor to RIO achieving its highest-ever levels of both profits earned and dividends paid.
This led to the company pulling in a massive US $21.1 billion in profit (up 72% year on year over 2020), and rewarding shareholders with a $16.8 billion total dividend windfall – an impressive yield, even by mining industry standards.
At such a scale of volume, minimising and optimising extraction costs are key, and Rio clocked in costs of $18.60 per ton for 2021. Combined with a 45% increased average in the fines price over 2020 and the additional resurgence in Chinese demand for iron ore, and it’s no wonder things looked so rosy for the balance sheet – with the soaring prices achieved for aluminium and copper just icing on the cake.
All this was achieved despite Covid-19 related staffing issues, WA’s temperamental border closure policy, the late dip in iron ore price and high shipping costs, which is again a testament to Rio’s achieved operational efficiencies & economies of scale.
While the figures for the year were slightly below analyst expectations, they were still objectively phenomenal. The sheer weight of the massive volumes of ore Rio can pump out combined with iron ore booming made the raw math overwhelmingly in its favour for 2021.
“At worst, the company looks like it is currently trading on the cheap vs. the combined value of its operations/assets.”
Moving into 2022, things are still looking positive overall, however a little more uncertain – and not just due to global geopolitics. The company has already given guidance of expected extraction cost-per-ton rises to $19.50 – $21 citing rising costs of input, labour, processing & maintenance.
Estimates given have also predicted the potential for an increased capital cost of around 15% due to ongoing Covid-19 restrictions, with knock-on effects for the planned ramping up of their Pilbara growth and replacement projects.
Combine this with the uncertainty around iron ore prices remaining this high – many feel that they’re still in something of a bubble in the first part of 2022 – and it looks like Rio’s share price is trading at a discount due to these factors.
Rio’s management appear well aware of this, and so are making concerted efforts to diversify further. This is highlighted by the company aiming to focus on battery metals in order to ride the energy transition bandwagon and expanding their portfolio deeper into other materials such as lithium.
In 2021, Rio signed a binding agreement to acquire Argentina’s Rincon lithium project, but also hit a snag after the Serbian government closed down a $2.4 billion lithium mine following public protests (which, unironically, may have been inflamed by the Novac Djokovic visa saga).
Copper has likewise been a key material for Rio. It’s already the second-highest contributor to the company’s bottom line, and it’s had several expansion and growth targets in its sights recently. This includes spending nearly $7 billion on acquiring all of the Oyu Tolgoi project in Mongolia via acquiring the remaining shares of business Turquoise Hill that the company does not already own at a 32% premium.
In addition, Rio has allocated a fair chunk of spend in order to attempt to rehabilitate its image. It’s had some controversial mishaps in recent years, including blasting heritage indigenous rock shelters during 2020 in the Pilbara region, released the results of internal investigations into allegations of sexual harrassment, and has been criticised by environmental groups for its impact and emissions.
As a result, management have said they will be spending a decent portion of their cash over the next few years on decarbonisation projects in the Pilbara ($1.5 billion), and implementing numerous measures and funding towards anti-discrimination & cultural heritage programs.
In the end, a bet on Rio as an investment in 2022 still largely comes down to how much faith you have in mid-level iron ore being sustainable from both a price and volume level. Recent rumblings about Chinese Covid-related lockdowns haven’t helped matters, and volume is crucial to Rio simply because it hauls significantly more iron ore than any other company.
At worst, the company looks like it is currently trading on the cheap vs. the combined value of its operations,/assets and its history of big dividend payments should still hold unless iron ore absolutely falls off a cliff further along in 2022.
5. Fortescue Metals Group (FMG)
Pros:
- Extremely low-cost ore producer per ton
- Historically high dividend payer
- Spending significant capex to improve ore quality
Cons:
- Money being spent on non-ore ‘green’ focus (con… or pro?)
- Low grade ore can be first hit by tightened restrictions
How you feel about Fortescue in 2022 will likely depend on how much faith you have in the success of the widely-publicised green crusade of founder Andrew Forrest almost as much as the company’s base iron ore operations.
Located in the Pilbara region of Western Australia, FMG’s core aim has always been about cranking out massive volumes of lower-quality iron ore at cheap prices that trades at a discount to the “benchmark” industry grade of 62% Fe.
What they lack in quality, they make up for in volume and efficiency, then use much of the profits made to pay a hefty dividend to shareholders – often one of the highest on the ASX.
Over the years, the company has refined this operation down to near-perfection, with an average cost of just US$15.28 per tonne as per their most recent financials at the end of 2021 – a very cheap number even despite recently increased power input costs.
Given the company achieved an average sale value of US$96 per ton, this is again an absolute money-printer; just in a different way to the higher-grade ore companies mentioned above.
This is even factoring in the ‘discount’ that FMG’s ore – typically between 56-59% Fe – experiences, just as higher grades attract a premium.
However, in recent years much of Fortescue’s focus and rhetoric has shifted away from pure ore operations and into talks of decarbonisation and “green energy” projects that have dominated much of its narrative. The company has publicly given aims for Net Zero emissions by 2040, and has made the pursuit of renewable “green” hydrogen a focus.
FMG formed the Fortescue Future Industries (FFI) sub-arm of the company to focus on these green initiatives, and has committed to allocating 10% of its NPAT towards these projects. With the company expecting to spend around $500 million on FFI in 2022, it’s a not-insignificant portion of the company’s income.
And herein lies the dilemma for investors (or potential investors) of FMG. One the one hand, the pursuit of cutting down emissions and branching out into green energy is admirable both from an ethical perspective, and for the potential business diversification it would offer.
Advocates would argue this would help Fortescue become less purely reliant on the often-wild swings in the iron ore price as the sole determinant of the company’s success from quarter to quarter.
“An investment in FMG is almost as much an investment in Twiggy as an owner and his vision, as much as the iron ore price itself.”
Detractors would say that this is frivolous spending on a pipedream and that they’d rather the business stick to its strengths, and focus on optimising its ore production & quality even further instead. FMG is already spending heavily on its delayed Iron Bridge project with the aim of increasing its ore grades; is that not a better use of funds?
It also doesn’t help that FMG has worked its way into quite a large debt bill.
While the company is pumping out money & many of its holders are fixated on dividends, it would seem prudent to pay some of this down, especially given the potential capital expense of all its green and renewable projects taking place over the next few years.
This is especially true with the volatility of the iron ore price in recent times, and given that Fortescue’s lower iron ore grades are typically the first to suffer when restrictions for ore use tighten in China at the seemingly-random whims of its government.
In the end, as always an investment in FMG is almost as much an investment in Twiggy as an owner and his vision, as much as the iron ore price itself. It’s been correct – and highly profitable for investors – in the past, and moving forward that would appear to be the case even moreso.
His Tattarang Pty Ltd entity still owns over 36% of the company, and his ties to China have always been a strong point in ensuring the ore keeps flowing despite political tensions. Will that prove so again during this attempted green transition? We shall see.
6. Mineral Resources (MIN)
Pros:
- Lithium exposure helps offset iron ore price fluctuations somewhat
- Mining / crushing services a solid revenue generator
- Looking to expand production significantly in coming years
Cons:
- Expensive costs of production makes them highly subject to high ore prices
- Low average ore grades attract hefty discount
- New growth projects are a couple of years away
It was a rough open to 2022 for billionaire Chris Ellison’s Mineral Resources as far as share price performance goes, as the cumulative effects of multiple forms of price gouging hit MIN’s operations in the back half of 2021.
The company experienced a shocking 80% EBITDA drop year on year in the first half of 2022 over first half 2021, as the CEO cited the combination of the significant fall in iron ore prices as well as increased shipping and labour costs for a period in which the company – normally a cash cow – went from a net cash position into net debt.
While it’s easy to blame these factors, the same was true for the rest of their peers as the same decline hit industry-wide. However, this disproportionately affected MIN in particular largely due to the heavy discount imposed on the company’s lower iron ore grades.
MIN’s two core hubs for iron ore in Western Australia at Utah Point and Yilgarn combined to achieve an average grade of only around 58% between the two, resulting in only around a $95 per ton sale price achieved. With a cost of extraction/shipping of $104.2 per ton at Yilgarn and $96.3 per ton at Utah Point, both figures led to selling at a loss.
The company’s forte is, much like rival FMG, specialising in shipping mass quantities of lower-grade ore at high tonnage. MIN achieved record export levels of 9.9Mt of ore, however unlike FMG it can’t post the same cheap costs of extraction.
It didn’t help the short-term bottom line that MIN greatly increased capital expenses in order to help future-proof themselves further for the long-haul. Their $403 million of cap-ex hurt the balance sheet, however was done with the vision to greatly ramping up ore volumes even further in the coming years.
The journey to add further ore supply from additional hubs is underway, with two additional locations aimed to be up and running over the next 2-3 years. Their Ashburton project is scheduled to start producing its first ore around the start of 2024, with an estimated ~30 year mine life at 57.5% Fe; its Pilbara hub also boasts around a 30 year life of mine, with a higher 60.5% Fe grade.
In addition, MIN does have a couple of tricks up its sleeve that none of its ASX iron ore peers can otherwise boast.
The first is its mining and services division, which contributes not-insubstantially to MIN’s bottom line and adds further diversification, offering services such as design, crushing and maintenance. Ellison has said the division is aiming for 15 to 20% growth year on year over the next five years, which would be a huge boon.
“MIN does have a couple of tricks up its sleeve that none of its ASX iron ore peers can otherwise boast.”
Secondly, MIN can claim the status as being one of the world’s biggest hard-rock lithium producers. With its joint-owned assets at Mount Marion & Wodgina in WA with American company Abermarle, the company has positioned itself in a right-place-at-right-time spot to take advantage of soaring lithium prices before much of the rest of the world’s new projects can come online.
While MIN need to try and implement some serious cost savings even though the price of iron ore is looking promising so far in 2022. One major way could depend on the success of potential gas projects the company is aiming to develop after making discoveries in the Perth Basin.
Should these be able to provide power direct to MIN’s projects, the cost savings on the soaring price of energy could cut down on expenses significantly once up and running, as well as be able to be on-sold to customers.
In all, MIN has spent a lot over the past half year and seen its share price tumble, however it may be primed for a rebound given the high prices Lithium has been receiving, as well as the recovery in iron ore.
This may well be a very good time to have a look at MIN given its decent future-proofing, and a reversal of fortunes over 2021’s results. Given Chris Ellison still holds nearly 12% of its shares, you can bet he’ll be motivated to prove that the recent downtrend was just a blip.
7. Mount Gibson Iron (MGX)
Pros:
- Higher quality ore grades (when main pit is optimised)
- Coming off a massive down period so a strong quarter could dramatically increase share price
- Increased shipping volumes should have large impact on performance
Cons:
- Has been unprofitable; released target downgrades
- Prone to weather issues leading to missed production/guidance
- Flagship iron ore asset has limited mine life
- Secondary asset also currently suspended
An iron ore miner that is coming off a pretty horrid quarter and looking to bounce back, Mount Gibson Iron has a duo of iron ore assets in Western Australia which both offer very different histories and prospects moving forward.
MGX’s chief project is its main iron ore mine located on Koolan Island in remote tourist hotspot the Buccaneer Archipelago off the WA coast. While the mine has a limited mine life of around 5 years, the potential for generating high iron ore grades is its major drawcard – although things haven’t always worked out that way to date.
This has mainly been a result of bad luck, as multiple factors have occurred to hinder operations outside of the company’s control. Notably, these include cyclonic weather leading to flooding, as well as a landslide towards the end of 2020 which blocked access to the highest grade zones for ore in the mine’s main pit.
Wide-scale cutbacks by the Chinese government in a concerted effort to cut down on iron ore consumption & steel production limits in the latter half of 2021 only compounded matters, particularly given MGX were only able to produce lower iron ore grades during the period due to the aforementioned rockfall.
The combination of dropping global ore prices and discounted ore grades had about the effect you would imagine, while MGX also had to pour in millions of dollars worth of funds to invest in waste stripping & ground support programs in order to improve operations heading into 2022.
Issues were even further exaggerated as the company’s second asset – its Shine Iron Ore Project in Western Australia’s midwest – was shut down due to being only able to produce lower, non-economically-viable ore grades.
“The good news is that, after such a series of relative disasters, things look to be only trending better for MGX in 2022.”
All of this together resulted in the company reporting a net loss of over $65 million for the half year after only being able to sell 0.7 Mwmt of ore; a near-70% drop year on year.
The good news is that, after such a series of relative disasters, things look to be only trending better for MGX in 2022. The company has already cited improved ore quality as the year has started, with the goal of maxing out at a consistent 65% Fe grade once operations have been fully refined.
A lot of how MGX’s share price performs in 2022 will simply come down to how much ore it’s able to ship. The company has already revised down guidance for FY22 to the 1.5 – 1.7Mwmt range, and factors such as the island’s tropical weather vulnerability need to be taken into account.
A lack of ships to transport the actual ore also doesn’t help matters, and a need to guarantee a regular transport flow is crucial moving forward.
If high iron ore prices hold, the suspended operations at Shine & which had been put under care and maintenance, could possibly be justified reactivating, however given recent iron ore volatility this remains to be seen.
On the plus side, MGX has no debt to weigh it down should they fail to meet guidance targets. Likewise, the company has a range of investments in some junior explorers to try and identify additional assets & help alleviate the ticking clock of the Life of Mine pressure on Koolan Island.
Overall, while its share price at time of writing currently looks fairly appealing, this could swing wildly either way depending on volumes achieved to kick off 2022 – so much so that it probably has one of the biggest swing performance variable levels of any Aussie iron ore stock on this list.
It’s coming off an extremely low baseline that hopefully for the company, shouldn’t be hard to exceed. If management can turn in even an average performance to start off the year, this might be due for a quick re-rate.
8. Fenix Resources (FEX)
Pros:
- Higher ore grades attractive
- Has paid massive dividends in the past
Cons:
- High cost of production
- Limited life of mine
- Some lingering distrust in management & their choices
- Uncertain dividend policy
Fenix Resources (FEX) is another fairly-recent ASX listee and producer, having produced the first ore from the company’s Iron Ridge ore project in Western Australia not too long ago in December 2020.
The company’s mine sits in a fairly isolated position – nearly 500km from the port of Geraldton on WA’s coast from where its ore is shipped – and it’s this location that plays a significant part in hindering some of the feasibility of FEX’s operations from a price efficiency standpoint.
While Fenix’s mined ore is of a solidly-high quality, averaging around 62% Fe for its fines product, and over 64% Fe for its lump (averaging almost a 50-50 ratio between the two since the project launched) and thus commands a decent premium, it’s the tyranny of distance that makes FEX even more subject to iron ore price fluctuations than most others on this list.
Input prices such as fuel play an outsized role in delivering its product to port by road, and these costs ballooning recently has led to a tumultuous six months for the company. Despite achieving a record volume of 356,710 wet metric tonnes (wmt) of iron ore sold during the December 2021 quarter, this resulted in a substantial monetary loss.
While the average price received was ~$77 AUD per ton during the period, cash costs for the quarter were $94.09 AUD per ton shipped – it doesn’t take a genius to do the math from there.
FEX management copped a fair helping of shareholder criticism as a result of selling high grade iron ore for low prices instead of just stockpiling, and received a lashing via a high percentage of “NO” votes against director compensation as a result.
“It’s the tyranny of distance that makes FEX even more subject to iron ore price fluctuations than most others on this list.”
This lack of disclosure of the loss-making operation in late 2021 sent the share price tanking once it was revealed, and has led to a lingering distrust in management that seems to have remained to this day.
The fact that the company’s share price performance has not been tracking along with the increase in iron ore price (as most of the other companies on this list have) we’ve seen to start 2022 seems to be a case-in-point reflection of this.
It’s also despite the fact that the raw math currently says FEX almost has to be highly profitable at early 2022 iron ore prices; people are instead taking a “wait and see” approach that has left the company’s share price stagnant.
A decent dose of insider selling by the company’s founder in September 2021 with no subsequent buying from insiders didn’t help matters, either.
Still, even after such a disastrous quarter, FEX still has $54 million in cash as of the end of December 2021, and macro iron ore conditions are shifting in their favour.
Shareholders are no doubt simply hoping for much stronger figures for the company’s reports as 2022 rolls along given these higher iron ore prices, and praying the quarter mirrors the end of 2021 in an exact opposite way.
Shareholders likely also want to see plants for the guarantee of a dividend if the current higher iron ore prices hold, which would go a long way to reversing FEX’s current negative sentiment. Life of mine also likely remains an issue, with the Iron Ridge project only having around 6 years worth of resource remaining.
9. Tombador Iron (TI1)
Pros:
- Potential for rapid share price growth pending domestic contracts
- High quality ore resource
Cons:
- Shipping costs an inhibitor to viability
- Slow ramp up speed to desired production/sales tonnage
- Resource size fairly small
One of the newer operators on this list having only existed in its current state since 2020, Tombador Iron (TI1) launched in its present form after acquiring 100% of the namesake Tombador Iron Mine on the east coast of Brazil in order to commence production.
The mine is a simple, open-cut mining operation that was targeted due to its higher-grade hematite iron ore deposit clocking in at over 65% Fe grade – the highest of its kind so far available in Brazil.
Having recently conducted an ore reserve estimate and life-of-mine plan, the main issues surrounding the company are twofold: first, the relatively small size of the resource itself, and secondly, the massive blowout in transport costs that have recently hit the global market.
TI1’s maiden ore reserve is only a ~5.6Mt resource, which at their current production rate of around 190wmt per quarter translates to just over a 7 year life of mine. That timeframe shortens even further should the company be able to achieve their target production of 1.2Mt per year.
This combines with their latest estimate of a $78 AUD per ton cost of operation to make for a fairly tight margin when the mixture of iron ore costs are low & transport costs are high. It has been especially of concern when dips in the iron ore price – such as experienced in the final quarter of calendar year 2021 – go below a viable threshold.
“The ability to sell more product domestically would massively help alleviate the drag of shipping costs.”
Smartly, Tombador’s management have been using these down periods to stockpile ore reserves in order to sell in more profitable conditions rather than sell for a loss for the sake of maintaining operations. As iron ore prices have shot back up at the beginning of 2022, the company should now be making a tidy profit on their shipped exports.
Tombador sells their ore as both an export product and to domestic Brazillian steel mills at around a 70%-30% ratio; they currently have testing trials underway with domestic mills, and confirmation of more domestic business would go a major way to making TI1 look more appealing as an investment.
The ability to sell more product domestically would massively help alleviate the drag of shipping costs and would likely grant a re-rate in share price should they be able to secure contracts.
Recently the company have also invested in their own cone crusher in order to help speed up operations and hopefully approach their stated higher production goals.
They’re currently sitting on around $25 million in cash as of their most recent update for the end of 2021, and have given an estimate of A$53.7M EBITDA per year should they be able to max our desired production.
While TI1 are not likely to pay a dividend for the time being, even should they choose to do so this may not be the optimal choice for Australian investors. As the company operates in Brazil, any dividends issued would not be franked given the jurisdiction.
As a stock, TI1 is also a fairly low-volume offering on the ASX, and can be illiquid which can make it hard for traders to get in or out.
10. CuFe Limited (ASX:CUF, formerly ASX:FEL)
Pros:
- High quality iron ore grades
- Aiming to ramp up volumes shipped
- Has secured solid price hedging in place
Cons:
- High cost of extraction & transport
- Looking to diversify into copper – not ideal for those looking for pure iron ore smallcap
Formerly listed on the ASX under the name/ticker code combo of Fe Ltd/FEL, Western Australia-based CuFe underwent a company name change in December of 2021 to reflect its attempted upcoming diversification from an iron ore pure-play miner, to a dual-purpose iron & copper mining operation.
While the company’s main featured resource offering is their 60% controlling interest in the Wiluna West JWD deposit in WA, they also recently acquired another 60% interest in an exploration package covering a copper corridor near Tennant Creek in the Northern Territory – hence the re-brand.
However, as their copper arm remains purely prospective at this point, it’s still the iron ore for CUF that will be the more immediate drawcard for investors.
CUF’s project is another that features high-grade iron ore as a selling point, with the asset most recently generating an average grade of 63.7% Fe, which is then transported to Geraldton for shipping.
Most recently, the company has secured shipments with South East Asian steel mills due to favourable pricing and shipping lane logistical factors that make this region an ideal client base.
As of the end of 2021, CuFe has achieved iron ore pricing sales at an average of US $100.56 per ton (or $138.78 AUD) which compares favourably to many of their WA-based peers. They’ve also put some strong price hedging in place to ensure some stability given the volatility of iron ore prices recently.
“They’ve put strong price hedging in place to ensure some stability given the volatility of iron ore prices recently.”
As of Q2 for financial year 2022, they shipped just under 120,000 tons of ore, and have introduced night shifts for crushing and screening to increase pace of operations. They’ve also contracted additional haulage for a ramp up of the rate of ore transported to port.
High costs per tonne remain the main sticking point for CUF; this is another company that requires a high iron ore price to be viable, however management have proven fairly smart recently to lock in place the aforementioned price hedging.
CUF also operate on a contract structure, paying other existing listed ASX mining companies for use of their facilities rather than starting/building from scratch to save on capex.
They also ideally need to look into whatever cost reduction options there are available to enhance profitability at JWD.
CUF also own a 50% interest in the Yarram Iron Ore Project not far from Darwin in the NT, which could (eventually) serve as a potentially a lower-cost alternative, however this has yet to be utilised.
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