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ARI 2.2¢

Getting real

  1. fitnfam

    1,844 Posts.

    ARI's fob price for the last QTR was $50 us when the average 62% platts was $74

    Consequently ARI was recieving around 2/rds the platt price.
    Platts averge for Jan was around $68 using the vale index.
    One could then say ARI has recieved between $45-$46 in January some$US5-6 less.

    Unfortunatrely that doesn't carry through on a percentage basis as freight is in US$
    So throwing the freight back into the equation ARI recieved $64US when the platts was at $74. i.e. 86% Platts.

    Assuming discount for grade stays the same along with freight costs then the figures end up at 58.48 less $14 freight =$44.50US x1.29 exchange rate= $57.40 AU

    Sounds good unless you now do the same at $62 which is where current pricing is and do the same maths.$62x.86%=$53.32-$14US freight =$39.92x1.29= $50.72 au

    So even with ARI's cost cutting/restructure if already inplace-ARI could be paying $5-7 a ton to sell its ore currently.
    Add to this $70m retsructuring SI and also add reduced capital spend -30% to $400m over the next 4yrs,it all adds up to considerble negative cash flow. say $100 a year.
    possibly over the next 12 months around $100m capital,$70m restructure SI and $45m + loss from actaual mining =$215m or so at a guess.

    Those expecting a dramatic price rise or a change incircumstances forget the momentum of existing projects ramping up and although marginal producers will be ramping back if they can-The moment there's a chance of making a $1 a ton production will rise there as well.

    The booms been 4-5yrs thanks to China's central planning speeding up IO demand for infrastructure.Those countries touted as replacing that or duplicating that market control,just don't have it(central planning),or like Brazil already have their own supplies.

    So until the cost of production at Vale, RIO,or BHP's equates with the cost of a profitable new mine,none will be economically opened.

    The trough and the lossses could be as long as the boom i.e. 4-5yrs until the slack in existing cheap production is taken up or production balanced down.
    New steel mills don't just open every week and 100's of millions of tons of Iron Ore don't get sold to sit on wharves or paddocks for years.
    Nor does it cost peanuts to build steel mills e.g.. 1.2mt for $1.15Bn US $ and 4yrs construction.


    DYOR + DYODD In a stagnant demand world with over supply-what happens?
    It becomes much Like oil the wells that keep producing to pay something towards the bills,until the pump breaks,or the lack of cash calls a halt to operations.
    No-one rushes out to drill any more for a while.

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