I've been in a process of maturation with respect to the market outlook for iron ore and what may be a sensible long term price assumption in my base case DCF estimate. For the time being I will base my DCF estimate on a long term real price assumption for iron ore concentrate/pellet feed FOB Kemi of USc 123/dmtu which is 10 % above the 2009 benchmark price.That is an increase of 10 % from my previous estimate and is based on an assumption of a 50 % increase in this years benchmark price. Consistent to this long term assumption for the price of iron ore concentrate (USc 123/dmtu) I use USD 435/tonne as long term real price assumption for iron nugget. Due to these price increases and some other model adjustments I increase my estimate for unrisked DCF per share (fully diluted for future share issues) to NOK 40 (from NOK 30). The share price target for 2010 I increase to NOK 20 (from NOK 15). Pareto Sec’s share price target also is NOK 20. If the final outcome for the 2010 benchmark iron ore price increase will deviate from +50 %, maybe it will be appropriate with adjustments in the above mentioned estimates.
Current spot prices for iron ore in China adjusted for current shipment costs reflect a level about 75 % above Brazilian benchmark price for 2009 and 95 % above Australian benchmark price for 2009. Forward prices for Q2’10, Q3’10 and Q4’10 reflect slightly lower prices than todays spot price.The lowest one, Q4’10 reflects a price level 65 % above the 2009 benchmark prices for Brazilian iron ore and 85 % above for Australian iron ore. Since some major iron ore producers, like no. 3 – BHP Billiton, are eager selling iron ore this year close to spot prices, the 40 year old benchmark price system may be diluted going forward. Maybe a modified version will emerge with quarterly price agreements for iron ore like what is new this year when BHP recently has made a quarterly benchmark price agreement for the other bulk commodity, coal, with a Japanese customer. Maybe it’s a bullish sign for the price development going forward when a major like BHP is so keen on more short term price agreements than earlier.