Renaissance Remains Positive on Near-Term Outlook for Iron Ore Prices
OREANDA-NEWS. September 13, 2011. Renaissance Capital, the leading emerging markets investment bank, remains positive on the near-term outlook for iron ore prices, believes that iron ore producers with growth projects in emerging geographies look increasingly more attractive than their Australian peers, considering their lower capital cost estimates and significant trade discounts.
The average annual capex per tonne of iron ore capacity in Australia is currently around USD 175/t, Renaissance Capital analysts say; whereas capital costs in the emerging West Africa hub and Russia/Ukraine are estimated to be 15-30% lower at around USD 120-150/t. It is also noted that the current cost of adding new iron ore capacity in Western Australia has increased to as much as USD 190/t.
Based on P/E and EV/EBITDA metrics, iron ore producers with growth projects in emerging geographies trade at significant discounts to Australian producer Fortescue, Renaissance Capital analysts say. While this is not surprising, it highlights the potential re-rating of companies that can deliver growth. For example, IRC and African Minerals have forecast EV/EBITDA and P/E multiples >50% below Fortescue in 2016, when production has largely ramped up.
Companies across the Renaissance Capital iron ore coverage universe have experienced significant cash cost inflation, with costs up by as much as 55% in the past 12 months. EBITDA margins, however, remain at elevated levels, averaging ~50% in 1H11 for producers Fortescue and Ferrexpo, Renaissance Capital analysts say. For BHP Billiton’s and Rio Tinto’s current iron ore EBITDA margins of ~75% to fall back to their 10-year historical average of ~60%, iron ore prices would have to decrease to ~USD 110/t (62% Fe, CFR China, dry) assuming cash costs remain constant at ~USD 45/t.
Renaissance Capital remains positive on the near-term outlook for iron ore prices, forecasting an average price of USD 155/t (62% Fe, China CFR, dry) through 2012 and 2013, before a decline to a long-term price of USD 97/t, real, in
Renaissance Capital is initiating coverage of Fortescue Metals Group (FMG AU; HOLD; TP AUD6.30) and IRC Ltd. (1029 HK; BUY; TP HKD2.90). It has also provided company updates for Ferrexpo (
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