ASX iron ore juniors have not escaped the stock price pain caused by rising inflation/interest rates in major economies and slowing China due to its COVID lockdowns. In fact, they were hit harder.
Fair enough, juniors are more speculative after all. But it has made Garimpeiro wonder if the sale at juniors has been overdone and if there is some value to be had at lower levels.
Right off the bat, it has to be said that it all depends on where the price of iron ore goes from here. Last time Garimpeiro looked, iron ore was US$133/t. This puts it midway between the CY2021 average of US$156/t and the CY2020 average of US$105/t.
So the price hasn’t exactly collapsed as market pessimism around the slowdown in China suggests. Sentiment has certainly soured towards the future direction of iron ore. But for now at least, the price is holding up just fine.
So no more big dividend checks from Rio Tinto, BHP and Fortescue. And who knows, a return of purchasing support for juniors. Morgan Stanley’s Commodity Office actually believes there is an advantage in price – after a bit of a wait, that is.
“With supply from the majors up after a disappointing first quarter and steel demand from China not yet rebounding, there may well be more downside to the price of iron ore in the near term as the market will ease,” the report said.
“However, as the lockdowns are expected to ease and the stimulus becomes more effective during the third quarter, we still expect China’s steel demand to pick up, which could push production up by steel and open steelmakers’ margins again, allowing the price of iron ore to rebound.’
“Therefore, we believe that our base case of US$163/t for the second half of 2022 is still a realistic target at this stage.”
He added, however, that the outcome would depend on whether Beijing failed to meet earlier orders to cut steel production for the whole year.
All of that is enough for Garimpeiro to go hunting for iron ore juniors, all of which are trading well below their 52-week highs.
FENIX (ASX:FEX): trades at 31.5c with a market cap of $162m (cash in bank was $85m at the end of March).
The boutique iron ore producer at the Iron Ridge project in the mid-west region of WA generated $33 million in free operating cash flow in the March quarter. Cash costs were A$81.72/t, so there’s a lot of fat on current iron ore prices, and the company has an in-the-money hedge providing additional protection.
Fenix now pays taxes, so fully franked dividends are part of the plan (50-80% of profits), subject to the usual qualifiers. Specifically, the success of Iron Ridge prompted the company to consider growth through a combination of expansion, exploration and regional project acquisitions.
All three would leverage the Iron Ridge processing base, the company’s joint venture haul truck fleet and its export infrastructure in Geraldton. As is known, all the iron ore in the world is not worth much if there is no way to the export market.
Fenix has a proven solution. That means iron ore deposits stuck in the Midwest with no path to export markets — and there are plenty of them — are more valuable in the hands of Fenix than in the hands of an owner without export solution.
MAGNETITE MINES (ASX:MGT): Trading at 2.6c for a market cap of $98m. The company is now funded to complete a definitive feasibility study and secure project financing for its Razorback project in South Australia after raising $15.8 million from a recent rights issue.
The momentum for the staged development of the huge magnetite resource is also building in response to increasing pressure on the global steel industry to clean up its emissions. Using the type of high quality end product (68% iron) that Razorback will produce is an obvious starting point over using 58-60% Pilbara iron ore.
Razorback’s soft magnetite ore will give it an operating cost advantage over competing WA magnetite projects, as will its ability to connect to existing power, rail and port infrastructure. And because SA has a power grid with high renewable energy penetration, Razorback gets another “green” tick.
GENMIN (ASX:GEN): Trading at 21c for a market cap of $85m. The company was cited by Garimpeiro on December 18 for its Baniaka iron ore project in southeastern Gabon.
It was trading at 21c at the time and still is, not a bad effort given the recent turmoil in stock markets in general.
The resource base at Baniaka has just been massively increased to 700M/t and there is more to come. Genmin is therefore not exactly resource constrained as it aims to be a producer by mid-2024, initially at an annual rate of 5Mt.
As mentioned in December, Andrew Forrest’s Fortescue has shed light on Gabon’s iron ore potential by embarking on a three-year study that could lead to his involvement in the development of the Belinga project in the central nation of l ‘West Africa.
Genmin stepped in much earlier and is currently working on a preliminary feasibility study for Baniaka. A recent deal to access nearby hydroelectric power gives Genmin a big boost on the “green” credentials front.
It should also be noted that Chinese interests are crisscrossing Africa in search of large iron ore projects that can reduce their reliance on Pilbara iron ore. Does this make Genmin a takeover target for the Chinese?
Time will tell on this point. In the meantime, the company is pursuing the various workflows to achieve this mid-2024 production target. Bell Potter has a 45c valuation on the stock.
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