The work hasn't stopped at major miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) despite their recent outstanding results, with both management teams aiming to drive costs even lower to enhance returns to shareholders.
(You can find out more about Rio's and BHP's interim results here, and here.)
As hinted at in BHP's announcement and reported by Fairfax media, BHP has an 'extreme imperative' to force costs lower, with the miner reportedly targeting iron ore costs under US$15 per tonne in the near future.
BHP mined iron ore for US$20.40 per tonne in the 6 months to December 31, while Rio Tinto's costs were US$17 per tonne.
With costs plummeting, low oil prices, market dominance, and a weakening Australian dollar, BHP and Rio face virtually zero threat to their existence regardless of how low iron ore prices drop.
The same is unfortunately not true at smaller miners like BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO) who have a much higher minimum production cost than Rio and BHP, thanks to lower output minimising the amount of cost aggregation (spreading costs out among tonnes of ore mined) that can be done.
While BC Iron looks fairly comfortable if ore prices stick around their current level, all bets are off if the major miners continue ramping up production and begin a 'race to the bottom'.
And if you think the smaller miners could be in trouble, the situation is even worse for mining and engineering contractors like Worleyparsons Limited (ASX: WOR) or UGL Limited (ASX: UGL) who find themselves competing for a rapidly shrinking pool of available work.
It's probably going to get worse before it gets better – and we're talking possible company collapses here, not just shrinking earnings.
BHP and Rio are at risk of decreasing earnings if the iron ore market weakens, but one thing they're not going to do is go broke.
So if you absolutely have to be invested in the iron ore sector, those are the only two companies I would pick.
