MGX 2.38% 43.0¢ mount gibson iron limited

THE iron ore price has been the subject of intense downward...

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    THE iron ore price has been the subject of intense downward pressure in recent weeks, but mid-tier producer Mount Gibson Iron is hopeful an end to the slump is imminent. Speaking at the annual Australian Investment Conference in New York, Mount Gibson chief executive Jim Beyer said a decline at this time of year married with the pricing cycle seen in years prior, although the recent descent had been sharper than normal. “There’s clearly a pricing cycle that’s related to the annual weather as much as anything else,” he said. “This time of year has been when there’s been a bit of softness in the price. Now that’s a bit of an understatement at this point in time, but we saw that two years ago — it just went down and it came up fairly quickly.” Asked whether a floor had been reached, Mr Beyer said he would “certainly like to think so”. “You get this consumption of stocks in China and then a rebuild of the stocks heading into winter, so traditionally the last quarter of the year is a fairly strong one,” he said. The comments follow an almost month-long retreat that has led the price of the commodity to a fresh five-year low of $US81.90 a tonne overnight. The latest losses leave the commodity with just one positive trading day in the past 18. Recent falls have largely been blamed on rising supply from mining giants BHP Billiton, Vale and Rio Tinto, while fears over the Chinese economy have exacerbated the problem due to worries about the strength of demand. However, Mr Beyer said there had also been an impact from a decline in sentiment as well as the reduced ability of traders to influence the market. “(The recent drop is) influenced by not just the cycle, but (also) the sentiment, the credit, (and) the new volume,” he said. “It’s like a confluence of all the moons — and the cycle will start to break … They’ve got to start restocking at some point in time.” The commodity’s retreat has ensured plenty of discussion about the tactics of iron ore heavyweights as they look to squeeze out marginal producers, but Mr Beyer wouldn’t be drawn on any suggestions the major players were acting irrationally. “Those guys understand their business and I wouldn’t even begin to describe the big guys as irrational,” he said. “I think they know what they’re doing, and they are doing what they see as being right for the shareholder. That’s the way free markets run.” The comments represent a contrast to a warning from Anglo American boss Mark Cutifani that the majors needed to show discipline or “they’ll pay a price”. Headline-grabbing analysis from UBS has recently shone the light on the potential break-even prices for Australia’s iron ore miners, with Mount Gibson seen among the lower-cost mid-tier producers at a perceived break-even in the mid $70s. Mr Beyer admitted capital costs relating to its Koolan Island development would make profit “challenging” in the short-term, but the firm remains confident about the future as it expects its operational costs to decline and Chinese demand to remain “consistent”. “At these prices the cash would be challenging because of the amount of capital that we need to put [into Koolan] … so overall the business at $US83 a tonne (iron ore) and 91 cents (exchange rate), that’ll be challenging our cash balance, but that is because we are in an abnormal phase.” As of the end of the June quarter Mount Gibson held cash reserves of $520 million with debt of less than $10m, which explains why it is “not worried” about cashflow. Meanwhile, Koolan will be able to comfortably turn a profit at current prices once its two-year recapitalisation is complete, with future cash operating costs “comparable with (market leaders) Rio and BHP”.
 
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