Iron ore miners are still under the thumb of record low iron ore prices coming out of China. Junior miners are particularly struggling since their total production costs are near or even over the sale price of iron ore.
A case in point is Atlas Iron Limited (ASX: AGO), the $167 million company which has lost 82% of its share price in the past year. The miner recently reported it lost money on each tonne of iron ore sold in the December quarter. The company’s half-year production costs were $67 a tonne, but the net sale price was $66 a tonne.
But a little relief came to the industry from two sources- cheap oil and a weakening Aussie dollar.
Oil collapse produces savings
Mining doesn’t consume crude oil for production, but uses a great amount of diesel fuel. Recent decreases in diesel have lessened production costs some. Shipping costs to China have decreased as well due to lower fuel costs. Atlas Iron managing director Ken Brinsden said on a conference call that his company saw a $4 a tonne decrease in sea freight. He emphasised, “Now that would take our headline break even position down into the low $60s.”
That leaves only a small window of relief to breathe through. Still, analysts expect iron ore to slip further down in 2015, so Atlas Iron and the other similar juniors like BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI) could get squeezed even more.
Falling Aussie gives earnings lift
As I previously wrote about the benefits of a weakening Aussie dollar, miners can also get a little more revenue for their ore since most international commodities are priced in US dollars. As exporters, sales revenue can increase if they can get the same amount of US dollars per tonne. We’ll have to wait until half-year earnings reports come out to see what benefit, if any, was gained.
Time to swoop in on cheap stocks?
Unfortunately, no. Only traders may try to make money going in and out of volatile share price changes. Investors should stay well away.
When China reported its GDP growth slipped to 7.4% this week, the market also found out that coal and iron ore imports to China hit new record monthly volumes. Chinese companies are taking advantage of very low commodities prices and stocking up.
However, this probably won’t do much to the supply glut of iron ore, so analysts don’t expect any significant rally to occur now.
Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) still maintain the fattest operating margins in the industry. They can still turn a profit, though smaller than when iron ore was over $100 a tonne.
Even sticking with the majors doesn’t promise a decent share price gain in the near term. Foolish investors should move to easier industries for more reliable returns.