Iron ore miners surge: Have you missed the rally?

Mount Gibson Iron limited (ASX: MGX) has seen its shares soar by more than 5% today to 72 cents, thanks to an upbeat announcement by the company.

Cash and term deposits have climbed to $520 million (equivalent to 48 cents a share) at the end of June 2014, thanks to $890 million in iron ore sales for the full year. That comes on the back of record ore exports of 9.7 million tonnes, including 2.6 million tonnes in the last quarter.

Another please note was the company’s statement that ore quality is expected to increase significantly in the 2015 financial year to an average 61% iron content. Low grade ore has flooded into the market, forcing producers including Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) to offer customers substantial discounts to the spot ore price.

Speaking of Fortescue, just yesterday the company announced that it had hit an annualised shipping rate of 160 million tonnes for the month of June. Fortescue also reported a 23% fall in C1 cash costs over the previous year with delivered cost to customers of US$49 per tonne in the quarter.

In another move to further lower costs, the iron ore miner has also announced plans to add a further 4 very large ore carriers (VLOCs) to the 4 it has already contracted a Chinese shipbuilder to build. The ships are designed to complement existing port infrastructure and further lower its operational costs. Fortescue shares are up 3.5% to $4.74 in mid-day trading.

Arrium Limited (ASX: ARI) ex-OneSteel shares are also up 3.5%, while BC Iron limited’s (ASX: BCI) shares had gained 1.5%.

As long as the iron ore price holds around US$98 a tonne, the smaller miners should still be able to generate decent profits. Of concern though is the massive supply that is still due to come online over the next few years – no doubt one of the primary reasons brokers including Goldman Sachs and Morgan Stanley are predicting a sliding iron ore price down to US$80 a tonne over the next five years.

This rally may well be short-lived.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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