Could BC Iron Limited be Australia’s best long-term mining company?

BC Iron Limited’s (ASX:BCI) proposed merger with Iron Ore Holdings Ltd. (ASX:IOH) will create a miner with great growth prospects, massive ore reserves and a sizeable cash balance.

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Most investors will be aware of the massive slide in the price of iron ore over the past eight months or so that wiped out billions of dollars of value from Australia’s iron ore miners.

Thanks to the lower price, the search is now on to find Australia’s most resilient miners – those that can maintain costs and continue to improve earnings until the price begins to rise again.

Fellow contributor Owen Raskiewicz thinks that Rio Tinto Limited (ASX: RIO) is now in ‘Buy’ territory after its latest results – and I’m not disputing it, I’ve owned Rio for years. However, there’s another Aussie miner set to become one of Australia’s longest-life iron ore assets.

That company is BC Iron Limited (ASX: BCI), and should its merger with Iron Ore Holdings Ltd. (ASX: IOH) succeed, investors can expect to see increased production and earnings, along with a greater potential to boost profits when the iron ore price recovers.

What’s happening?

BC Iron is offering 0.44 BC Iron shares and $0.10 for every Iron Ore Holdings (IOH) share, a proposal that IOH directors have recommended as in the best interests of shareholders.

Together the company will have reserves of 294 Mt at 58% Fe, 626.5Mt at 56.8% Fe, and 1.1Bt at 30.4% Fe, as well as cash of more than $190 million and debt of $54 million.

Why is it good?

In addition to increased iron ore reserves, the acquisition allows increased production which leads to increased revenue, while fairly low costs per tonne of the new mines mitigate risk of further falls in the iron ore price.

It also leaves the newly combined company with a strong cash reserve and low debt, while existing shareholders will enjoy a final dividend of $0.15 (5%) that IOH holders are not eligible for.

What are the risks?

The main risk is further falls in the iron ore price, and I expect it will fall further as more global capacity comes online in the next three to four years.

With total costs predicted at $60-$68 per tonne for 2015, there is only a modest profit margin (on existing mines, with a greater margin expected from IOH’s assets) which drastic price falls could put under pressure.

Earnings dilution is another one to watch out for, as if BC Iron acquires 100% of IOH, Iron Ore Holdings’ shareholders will own roughly 36% of BC Iron. Over several years the merger should benefit shareholders, but earnings per share may suffer in the near term.

If you’re looking at shares like BC Iron, you probably look at falls in resource prices as a potential buying opportunity (congratulations) instead of running for the hills.

It’s for investors like you that we’ve written this free report on three speculative resource shares to take advantage of recovering prices for copper, oil and gold.

If you’re interested, just enter your email address in the link below and we’ll send it to you. FREE!

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Motley Fool contributor Sean O'Neill owns shares in Rio Tinto Limited.

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