Advanced Explorations Inc. ADEXF

RE: Barrons Online: Iron ore prices are vulnerable

[VENMan]

https://www.steelguru.com/raw_material_news/Cliffs_Natural_Resources_and_the_future_of_US_iron_ore/306564.htmlThe No Rail Advantage: Cliffs Natural Resources share price has gone through a wild ride the last couple of years. This has been the case with nearly every iron ore miner with large assets in the US Iron Range.

The reason is simple, US iron deposits are too expensive to compete in the global market.

Take a look at the below global iron ore cost curve. I maintain a list of all iron ore mines in which I analyze their total cash costs of production per dry metric tonne. These may not be 100% correct but they're in the ballpark. I've highlighted in red all of Cliffs' North American iron ore operations and ID'ed the primary country areas of the curve.

With iron ore hitting a two and a half month low last week at USD 132.90 Cliffs' US mines are dangerously close to being unprofitable. We saw what happened in Q4 of 2012 when the prices had dipped below USD 90 million per tonne; the stock price plummeted and the dividend was slashed.

Now consider some of the recent forecasts for iron ore that we've been seeing. Goldman Sachs recently updated their iron ore price forecast to an average of USD 139 per tonne in 2013, USD 115 per tonne in 2014, and then falling all the way to USD 80 per tonne in 2015.

The Australian Bureau of Resource & Energy Economics also recently updated their forecast, dropping the 2015 average to USD 90 per tonne. The primary driver behind these forecasts are the sheer number of iron ore projects and expansions expected to begin production in the next year or two. At those kinds of prices, all US mines will find it difficult to compete. This includes operations owned by US Steel and ArcelorMittal; although Cliffs is, by far, the most exposed.

There are numerous strategies to profit or hedge against this kind of risk but if you're looking for a long-term iron ore play, consider the lower cost miners such as BHP Billiton, Rio Tinto, or Vale. I plan to complete a full analysis of the North American iron ore market next month. But the fundamentals are simple, a company can't be profitable if the price is lower than the cost of production. Of course, this doesn't take into account Cliffs other assets but it's enough to keep me away.