What a difference a year makes!
The two charts below are taken one year apart from UBS data and show the dramatic cost cutting that's been achieved by some mining companies as the iron ore price continues to hover around US$50 per tonne. The lower chart shows operating costs after the miners' cost cutting exercise.
The big winners from the crash – if there ever are – appears to be Kumba (from South Africa), South America's Vale, and Australia's Fortescue Metals Group Limited (ASX: FMG).
Surprising Efficiency
When the mining boom came to a screeching halt a couple of years ago, many analysts postured that it would be the end of Fortescue. Those analysts, and no doubt many others in the market, have been astounded at the company's ability to slash costs while maintaining safety levels. The result has been that Fortescue continues to generate a profit, albeit much lower than during the boom times.
The MAJOR surprise for me in the graph is the performance of our ASX giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
I heard a terrific analogy recently that compared BHP and Rio to our big banks. They're big, slow moving beasts that have struggled to drastically slash costs due to their heavily tiered management structure. The likes of Fortescue and Vale however, have been quicker to move because they've historically been run more like a start-up. I'm not sure how true the analogy is, but the numbers from UBS do tend to back-up the theory.
What does this mean?
In reality, it just means that the weaker producers have been able to buy more time. I personally doubt we'll see a return to consistent US$80+ per tonne iron ore prices in the foreseeable future which should, eventually, see weaker (higher cost) producers exit the market.
For investors this means you need to stick with safer bets and also understand why you're investing in them or in the sector. If its for dividends, there's probably just as much downside and far better income stocks elsewhere.
