We all know that the iron ore miners are being hammered as the commodity price fell more than 50% in the past 18 months or so. Investing in them now is akin to picking up 5 cent pieces in front of a steamroller – well for most of them that is.
Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI), Arrium Limited (ASX: ARI) and Mount Gibson Iron Limited (ASX: MGX) are frequently in the news. The small iron ore miners generally have substantially higher production costs compared to their larger brethren Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), with Fortescue Metals Group Limited (ASX: FMG) sitting somewhere in the middle on production costs.
But there may well be one diamond in the iron ore rough worthy of investors' consideration. While other miners are getting paid a discounted price below the spot price of US$59.49 per tonne, this miner receives a huge premium for its ore, thanks to the quality – less impurities and higher iron ore content.
That company is Grange Resources Ltd (ASX: GRR), a company hardly ever mentioned by the mainstream press.
In 2014, Grange received an average price of US$107.34 per tonne for its ore – compared to the average spot price of US$97 per tonne over the year. As a comparison, Mount Gibson received an average price of A$61 per tonne for the last six months of the year, when the spot iron ore price averaged US$82 per tonne. (Note Mount Gibson's received price is in Australian dollars – Grange's Australian dollar received price was $119 per tonne). The chart below probably explains it better.
Now Grange doesn't exactly produce much iron compared to the other miners. In the whole of 2014, the company sold 2.5 million tonnes of ore. That's nothing compared to Rio, which is already on target to produce 320 million tonnes annually.
Interestingly, investors place no value whatsoever on Grange's business, despite an underlying net profit of $76.4 million in the 2014 financial year (ending in December 2014). At today's price of 11 cents, Grange has a market cap of $127.3 million – less than the $153.6 million the company had in cash at the end of the financial year. The company even paid a 1 cent (unfranked) dividend for the year, putting it on a dividend yield of 9.1%.
There is one slight problem – Grange reports production C1 cash costs of $86.51 per tonne – much higher than its compatriots and excluding many other necessary expenses – but it is one reason why the company receives a higher price for its value-added product.
Grange also faces the same problem common to all miners – depletion of its resources – so will have to invest significant sums of capital to replace those resources over time. Still, at such a cheap price, Grange may be worthy of adding to your watchlist.
