Australian iron ore juniors start hedging

Australian junior iron ore mining firms are locking in iron ore prices through hedging to ensure the viability of their more marginal operations, while major producer Fortescue's chairman Andrew Forrest has warned investors not to bet against the iron ore price.

Iron ore prices have taken a pause from the decline that has seen them drop by a third since the record highs of mid-May, but some analysts are forecasting further falls as supply increases and China tightens regulation of its steel industry. This has led some of the more marginal junior mining firms to lock in prices over at least the remainder of this year, but not everyone is convinced that prices are on a downward trend.

"I would not bet against the commodity price for iron ore," Forrest said yesterday as he announced a net profit of $10.3bn for the year to 30 June, up from $4.7bn the previous year. Commodity forecasters usually only get the price right in hindsight, he added.

Western Australian (WA) mining entrepreneur Tony Sage is prepared to bet against the iron ore price, with his firm Fe locking in pricing collars for the October-December quarter at an average floor price of $153/dry metric tonne (dmt) and an average ceiling price of $199/dmt basis the 62pc Fe fines price.

"Iron ore prices have been volatile in recent weeks, so the adoption of a product hedging strategy is wise to smooth this, and it's comforting to know we have attractive pricing locked in on our first three ships," Sage said.

Fellow junior Fenix has hedged around 45pc of its planned production from October 2021 to September 2022 at A$230.30/dmt cfr China ($168.30/dmt) through swap arrangements.

"We have secured profitability until at least the fourth quarter of calendar year 2022, by which time the mine plan predicts the production of even higher specification iron ore that should result in higher market premiums," Fenix managing director Rob Brierley said.

Both junior firms have offtake agreements with larger firms and do not manage direct marketing to third-party customers.

Fe has an offtake agreement with UK-Swiss trading firm Glencore to supply iron ore from the Wiluna West JWD mine in the Mid-West region of the state. Fenix, which is ramping up its 1.25mn t/yr capacity Iron Ridge project in the Mid-West region, sells 50pc of its ore through Chinese steelmaker SinoSteel and 50pc through Australian iron ore producer Atlas Iron.

Argus assessed the ICX iron ore price at $157.20/dmt cfr Qingdao on a 62pc Fe basis yesterday, up from $131.80/dmt on 19 August but down from a high of $235.55/dmt on 12 May. Yesterday's assessment compares with $167.45/t on 1 April and $159.90/t on 31 December. Argus last assessed 58pc Fe at $125.30/dmt cfr Qingdao, up from $102.80 on 19 August but down from a high of $207.10/dmt on 12 May and $162.35 six months ago.

By Jo Clarke

Iron ore prices $/dmt