Don't catch falling knives: Junior iron ore miners may get squeezed more

Now is not the time to test the longevity or profitability of junior miners as iron ore prices make new lows.

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Junior miners that sprung up during iron ore market highs have some real troubles on their hands.

Major iron ore miners have the luxury of looking past the current market downturn as just another mining bust to live through. The mining industry is playing out a textbook scenario of attrition. Even closing a mine costs a lot of money, so companies like Atlas Iron Limited (ASX: AGO), Arrium Ltd (ASX: ARI) and BC Iron Limited (ASX: BCI) are forced to produce as much as possible, despite earnings taking a beating.

Three more years of pain

Investment bank Goldman Sachs didn't paint a pretty picture by saying the market will drive more high-cost miners out of business over the next three years, according to The Australian Financial Review. Up until now, there have been more Chinese iron ore miners leaving the market, but they will be getting some relief from the Chinese government's recent decision to cut taxes on production for domestic miners.

The fact that China buys almost 70% of seabourne iron ore exports means there aren't many other importers that can take up the slack. India may grow into such a consumer nation as it modernises, but that won't happen suddenly.

Mergers & Acquisitions in oil and iron ore

Interestingly, we are seeing more M&A activity in the oil and gas sector recently, brought on by the swift and deep oil price plunge. Apache Corporation's quick exit from Australian LNG and Royal Dutch Shell's sudden takeover offer for BG Group (which will make it the majority owner and operator of the QCLNG project in Queensland) is in contrast to the drawn-out iron ore drama.

Iron ore M&A hasn't happened much yet, so it makes me think that the big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) consider iron ore still a "falling knife" that hasn't hit the true bottom yet. Fortescue Metals Group Limited (ASX: FMG) management said it would consider buy-ins to some of its mines for outside investments. Nobody is rushing in just yet.

Track record of survival needed

I have written this before recently, but Foolish investors should stay clear of the iron ore juniors because you just don't know which could actually survive a prolonged downturn. They don't have the track record of BHP and Rio Tinto. Now is not the time to test their longevity or profitability.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.  We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policyThis article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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