Investment bank UBS has upgraded its long-term iron ore price forecast to US$93 per tonne, signaling that the commodity is not about to collapse despite predictions of a supply glut from the new Simandou project in Guinea.
Price Outlook Shifts Higher
UBS raised its long-term forecast from US$85/t to US$93/t, a level that closely matches current market rates. The bank argued that many forecasters are too pessimistic about future supply and demand. “We believe consensus underestimates the durability of steel demand outside China, overstates future iron-unit supply growth by focusing on ore tonnes rather than contained iron units, and assumes greater cost curve flexibility than industry data supports,” the report stated.
Focus on Junior Miners
The research report examines the impact of the price upgrade on major producers, but columnist Barry FitzGerald turns his attention to the smaller companies. He notes that many juniors are undervalued due to fears of a price dive, a risk he believes is overstated. FitzGerald points out that investment bank UBS initiated coverage of Champion Iron (ASX:CIA) because it is highly sensitive to changes in long-term prices.
UBS assigned a price target of $4.15 per share to CIA, which produces hematite and magnetite concentrates in Canada and Norway. This compares with the company’s current market price of $3.02. FitzGerald left the major sector to focus on the ASX iron ore juniors where a long-term price of US$93/t would materially improve project economics.
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Two Specific Targets
FitzGerald highlighted two specific stocks where a higher price forecast could create significant value. The first is Killi Resources (ASX:KLI), which trades at 29c per share. Killi acquired the Lodestone magnetite project in Western Australia’s Mid-West in June. The project contains an inferred resource of 110 million tonnes.
Lodestone is distinct because it produces coarse-grained recrystallised magnetite suitable for low-cost production of a premium 68-70% iron concentrate. This concentrate is used in direct reduction pellets for electric arc furnaces, a greener method of steelmaking. The project’s potential resource could quadruple in the next 12 months as drilling continues. East Coast Research recently set a price target of 60c on the stock.
Leadership and Market Targets
Former Fortescue chief Nev Power serves as the chairman. He previously worked at Smorgon Steel, which produced steel using scrap metal.
Arrow Minerals and Simandou
Flanagan previously grew Atlas Iron from a $9 million company to a $4.5 billion business before its sale to Gina Rinehart. Arrow is now focused on the Yarraloola iron ore project, located in the back yard of Rio Tinto’s Robe River operations. The company would benefit from the new open-access Mardie port, which is only 50km away, offering a much easier route to market compared to the trucking infrastructure used by Atlas.
