“Pick and shovel” stocks are often the simplest, most direct route to participate in a commodity bull market. By “pick and shovel” stocks, we mean mining services and logistics companies that provide key services to resource exploration and production companies. What are the advantages?
Mining service and logistics firms make money when commodity producers spend it. If companies like BHP and Rio Tinto want to find and produce larger quantities of base metals, they often need help, and are willing to pay for it in an economy that’s firing on all cylinders. In fact, ABARE estimates over $43 billion will be spent in 2007 and 2008 on expansion of existing resource projects or development of entirely new ones. That’s the opportunity.
Meanwhile, BHP and Rio are struggling to keep up with the booming demand from China itself. This creates an opportunity for second-tier iron ore companies to locate economic deposits of iron ore and develop them—often with the help of eager partners from China and Japan. We’ve tipped one such share below.
Murchison Metals (MMX:ASX)
Murchison Metals is a $1.769 billion developer with iron ore resources in Western Australia. Though the company isn’t operating in the traditional iron ore heart of Australia’s Pilbara region, it has excellent ore quality, top-flight partners, and is well on the way towards a record year in revenues. The firm’s main project is at Jack Hills in Western Australia. The prospect is located on 21 square kilometres and has an inferred resource of 67 million tonnes of ore. The important thing here is the ore is high quality; 62% iron (Fe). It can be shipped directly to the steel producers in Asia and is low in impurities.
Murchison completed stage one of its project in late 2006. That was to build a mine with five years of life at production of 1.5 million tonnes per year (Mtpa) from the outset, increasing to 2Mtpa by 2008. The mining, although behind schedule, commenced in September of 2006. Japanese and Korean customers are lining up.
Next on the docket is stage two of Jack hills, based on a potential iron resource of 380Mtpa at 62% Fe. Production in the second phase is more ambitious, at 25mtpa and maybe even more, with potential for expansion. The company is in the middle of a feasibility study for this stage of the project.
Meanwhile, it’s acquired a significant investor and partner. In 2007, MMX signed an agreement with Mitsubishi Corporation of Japan. The agreement brings in Mitsubishi as a 50% owner of MMX’s iron ore assets. Under the terms of the agreement, the parties will establish a 50:50 JV infrastructure business. This business will open up the mid-west of WA via rail and port.
The obvious downside is having to give up 50% of the company’s best asset. But this is how it works for a developer. You locate the resource. Then, a bigger partner provides the capital to develop that resource in exchange for some equity. Under the terms of the deal, Mitsubishi will arrange all debt funding for Jack Hills stage 2.
The total potential investment by Mitsubishi could reach A$3bn. On the customer side of the business, MMX has lined up a strategic ally in the Korean steelmaking giant, POSCO. POSCO injects $3 million into MMX, via shares and options, in exchange for a stake in
the company as high as 13%. POSCO also signs up to receive up to 10Mtpa when Jack Hills Stage two comes on line .
RECENT DEVELOPMENTS
Murchison Metals announced in late August that it had signed a definitive agreement with Mitsubishi Development. The agreement (as stated above) is for Mitsubishi to provide financing for MMX’s Jack Hills operation. In return, Murchison are giving Mitsubishi a 50% share of the project’s equity.
Jack Hills will be pivotal to Murchison’s success.
The announcement does nothing more than re-affirm that the deal will be going through. It’s confirmation that the company has serious overseas partners interested in long-term access to WA’s iron ore. The company’s most recent reporting period marked its first iron ore shipments. These were successful; MMX made three shipments at a high average ore grade of 64%. Production increased by a modest 3.3% on the previous quarter. Demand for iron caused price increases during the period. MMX has started its operations at the right time. But one downside of the boom for iron ore is congestion at ports. At a company level, this causes higher costs as ships lie idle. The hold-up will delay some shipments. Murchison stated that the situation is likely to continue for the rest of the year before improving in 2008.
Finally, in a separate release from the quarterly report, Murchison announced a Memorandum of Understanding (MOU) with Westnet Rail. The agreement heralds development of more rail infrastructure to accompany production increases from MMX’s major assets. The company is thinking ahead.
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Australian Iron Ore & Mining Sector Share Tips for 2008
“Pick and shovel” stocks are often the simplest, most direct route to participate in a commodity bull market. By “pick and shovel” stocks, we mean mining services and logistics companies that provide key services to resource exploration and production companies. What are the advantages?
Mining service and logistics firms make money when commodity producers spend it. If companies like BHP and Rio Tinto want to find and produce larger quantities of base metals, they often need help, and are willing to pay for it in an economy that’s firing on all cylinders. In fact, ABARE estimates over $43 billion will be spent in 2007 and 2008 on expansion of existing resource projects or development of entirely new ones. That’s the opportunity.
Meanwhile, BHP and Rio are struggling to keep up with the booming demand from China itself. This creates an opportunity for second-tier iron ore companies to locate economic deposits of iron ore and develop them—often with the help of eager partners from China and Japan. We’ve tipped one such share below.
Murchison Metals (MMX:ASX)
Murchison Metals is a $1.769 billion developer with iron ore resources in Western Australia. Though the company isn’t operating in the traditional iron ore heart of Australia’s Pilbara region, it has excellent ore quality, top-flight partners, and is well on the way towards a record year in revenues. The firm’s main project is at Jack Hills in Western Australia. The prospect is located on 21 square kilometres and has an inferred resource of 67 million tonnes of ore. The important thing here is the ore is high quality; 62% iron (Fe). It can be shipped directly to the steel producers in Asia and is low in impurities.
Murchison completed stage one of its project in late 2006. That was to build a mine with five years of life at production of 1.5 million tonnes per year (Mtpa) from the outset, increasing to 2Mtpa by 2008. The mining, although behind schedule, commenced in September of 2006. Japanese and Korean customers are lining up.
Next on the docket is stage two of Jack hills, based on a potential iron resource of 380Mtpa at 62% Fe. Production in the second phase is more ambitious, at 25mtpa and maybe even more, with potential for expansion. The company is in the middle of a feasibility study for this stage of the project.
Meanwhile, it’s acquired a significant investor and partner. In 2007, MMX signed an agreement with Mitsubishi Corporation of Japan. The agreement brings in Mitsubishi as a 50% owner of MMX’s iron ore assets. Under the terms of the agreement, the parties will establish a 50:50 JV infrastructure business. This business will open up the mid-west of WA via rail and port.
The obvious downside is having to give up 50% of the company’s best asset. But this is how it works for a developer. You locate the resource. Then, a bigger partner provides the capital to develop that resource in exchange for some equity. Under the terms of the deal, Mitsubishi will arrange all debt funding for Jack Hills stage 2.
The total potential investment by Mitsubishi could reach A$3bn. On the customer side of the business, MMX has lined up a strategic ally in the Korean steelmaking giant, POSCO. POSCO injects $3 million into MMX, via shares and options, in exchange for a stake in
the company as high as 13%. POSCO also signs up to receive up to 10Mtpa when Jack Hills Stage two comes on line .
RECENT DEVELOPMENTS
Murchison Metals announced in late August that it had signed a definitive agreement with Mitsubishi Development. The agreement (as stated above) is for Mitsubishi to provide financing for MMX’s Jack Hills operation. In return, Murchison are giving Mitsubishi a 50% share of the project’s equity.
Jack Hills will be pivotal to Murchison’s success.
The announcement does nothing more than re-affirm that the deal will be going through. It’s confirmation that the company has serious overseas partners interested in long-term access to WA’s iron ore. The company’s most recent reporting period marked its first iron ore shipments. These were successful; MMX made three shipments at a high average ore grade of 64%. Production increased by a modest 3.3% on the previous quarter. Demand for iron caused price increases during the period. MMX has started its operations at the right time. But one downside of the boom for iron ore is congestion at ports. At a company level, this causes higher costs as ships lie idle. The hold-up will delay some shipments. Murchison stated that the situation is likely to continue for the rest of the year before improving in 2008.
Finally, in a separate release from the quarterly report, Murchison announced a Memorandum of Understanding (MOU) with Westnet Rail. The agreement heralds development of more rail infrastructure to accompany production increases from MMX’s major assets. The company is thinking ahead.