Brazilian mining shutdown creates significant iron ore price spikes

In late January this year, tragedy struck one of Vale’s Brazilian iron ore operations, killing around 300 and injuring many more.

In late January this year, tragedy struck one of Vale’s Brazilian iron ore operations, killing around 300 and injuring many more. There was further chaos when independent inspectors found that another waste dam, the trigger for the initial disaster, was also at risk of imminent collapse. Surrounding communities were evacuated on the basis of this risk and Brazilian iron ore production in the region ground to a halt.

As a result, analysts at UBS forecast that nearly 93 million tonnes of iron ore had been removed from the market, almost instantly. Originally, the price of iron ore for 2019 had been tipped to hover around the US$65 mark, however in the wake of the shortage, UBS analysts are now predicting that number will be closer to US$85 this year. Furthermore, mining experts have said that in a worst case scenario, Brazilian iron ore operations could take up to 3 years to regain their previous output capacity.

The combination of all these factors is set to earn Australia its second highest return from iron ore exports on record, based on projections from the Department of Industry, Innovation and Science’s resources and energy quarterly report, which was released in March. Volumes are forecast to reach 847 million tonnes for 2018-19, resulting in an AU$74 billion return. If this holds true, that would mean the country had enjoyed a 21% increase on the same figure from the year before.

This isn’t just a short term, flash-in-the-pan change either; the Department’s report also highlights that the long-term forecasts are positive too. By 2023-24, they are predicting that Australia will export 902 million tonnes of iron ore in order to meet the demand, backed by producers increasing their production.

However, big players like Rio Tinto and BHP have both signalled that they will not be looking to increase their output in the short term to react to the shortage and consequential price increase, according to Glyn Lawcock, an analyst at UBS in Sydney. This was because he estimates it would take five years for these giants to add extra tonnes of production in Western Australia, commenting that “you can’t add small quantities of iron ore”.

His further observations makes for pleasant reading for shareholders too.

“Our base view is that this is going to be another year of just excess cash returns to shareholders”

As a result, in order to meet this shortfall, other players in the market are going to need to step up to the plate. Carpentaria’s (ASX: CAP) Hawson’s Iron Project has already received a conditional commitment to AU$5.4 million of feasibility study funding from Japan, signalling that there is both a need for the resource and confidence in Carpentaria’s capacity to fulfil it.

CAP’s Hawsons Supergrade® iron ore content is 70%, making it a contender for the world’s highest-grade product, making it extremely well positioned to maximise the benefits from the recent price rises. In order to extract the full potential of the location, CAP is seeking to raise AU$27 million to fund a 15-month Bankable Feasibility Study, to which that aforementioned $5.4 million is already committed. Australia is set to earn its second highest return from iron ore exports on record. With the Department of Industry predicting Australia will export 902 million tonnes of iron ore in the coming years and majors like Rio Tinto and BHP already ruling out reactionary production increases, Carpentaria’s Hawson’s Iron Project represents a smart play  offering long-term potential upside.

Investors interested in Company updates from Carpentaria Resources can join their mailing list here.

Carpentaria Resources trades under the ASX code: ‘CAP

*Reach Markets is paid a retainer to assist CAP with private investor management.

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