If you've been a reader of fool.com.au for a while, you'll probably know that Foolish contributors have been warning investors off the iron ore sector for nearly 14 months.
The Motley Fool's top analyst, Scott Phillips, called an iron ore bubble as early as September 2012 in an article for Fairfax media.
However many investors, including myself, continued to make respectable profits in the sector throughout 2013 thanks to a period of unexpectedly high prices.
As the major miners announced massive expansions to take advantage of continued high prices, I saw the writing on the wall and sold out of my shares in BC Iron Limited (ASX: BCI). I still hold Rio Tinto Limited (ASX: RIO), because it's one of the world's largest iron ore miners and has a lot of pricing power.
Rio's shares have also fallen only ~10% since the start of 2013.
Junior miners (with no market power) like BC Iron, Atlas Iron Limited (ASX: AGO) and Mount Gibson Iron Limited (ASX: MGX) have lost roughly 84%, 87%, and 70% respectively during the same time.
To my mind Mount Gibson has fared unusually well, especially after a catastrophic half-yearly report yesterday that should have sent investors running for the hills.
Writer Mike King covered the main points in his article yesterday, but here's a recap:
- Revenue down 63% to $188.9m
- Ore sold down 40% to 3.1m wet metric tonnes (wmt)
- Underlying gross profit before impairments down 97.8% to $2.7m
- $912.6 million in impairments, plus $33.7 million in ore inventory impairments
- Net loss after tax of $869.8m (majority of which is a 'paper loss' in the form of impairments)
The impairments followed reductions in value of the company's iron ore inventories ($33.7m), consumable inventories ($3.9m), mine properties ($708m), deferred assets ($17.6m), and property/plant/equipment ($183.1m).
A drastic drop in underlying profit was due to lower iron ore prices, combined with the failure of the Main Pit seawall at the company's Koolan Island mine.
The seawall collapse had about the effect you might think, with the entire pit now underwater (pictures can be found in Google for the curious reader). Unfortunately for shareholders and management, output dropped to zero overnight while costs continued until the site could be run down and placed on care and maintenance – where it will remain for the foreseeable future.
And the total effect on Mount Gibson's share price after this unfortunate results release?
Virtually nil.
Weird, right?
The company has clearly reached a kind of 'soft floor', where shareholder aversion to selling is greater than the impact of negative news on their motivation to sell.
That could change at any time though, and with the major miners expanding production and a big question mark over iron ore demand in the next few years, I have to say a purchase of Mount Gibson shares right now would be the worst kind of speculation in my opinion.
If you're itching to own iron ore, buy the major miners Rio or BHP Billiton Limited (ASX: BHP). They have the pricing power, the cash, and the contacts, and will be the quickest to jump when the sector improves.
