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Which iron ore miners are at risk with prices below US$40 a tonne?

Just two Australian iron ore miners are making a profit with iron ore prices now under US$40 a tonne.

Yes, you guessed it – the two companies are Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP).

Based on calculations of iron ore miners’ breakeven costs in April this year from investment bank UBS, Rio and BHP have breakeven costs of US$34 and US$33 a tonne respectively. Gina Rinehart’s Roy Hill project is a close third at US$43 a tonne, but still losing money at current prices.

From there it goes downhill.

Arrium Limited (ASX: ARI) with costs of US$46 a tonne, Grange Resources Limited (ASX: GRR) which needs prices at US$50 a tonne to breakeven, and Fortescue Metals Group Limited (ASX: FMG) at US$52 a tonne.

Bringing up the rear are Mount Gibson Iron Limited (ASX: MGX) at US$58 a tonne, BC Iron Limited (ASX: BCI) at US$59, and Atlas Iron Limited (ASX: AGO) at US$63 a tonne.

Source: UBS

Source: UBS

Clearly, all the junior miners appear headed for oblivion unless iron ore prices recover. Two things have so far worked in their favour since UBS released its data in April 2015. The Australian dollar has fallen from 76 US cents to 73.3 US cents and almost all of the juniors have managed to cut their production costs even further.

In the September quarter, Fortescue reported C1 cash costs of US$16.90 per tonne, compared to US$22.16 a tonne in the June quarter and US$32 a tonne in the previous corresponding period. The miner is aiming to end this calendar year with costs at US$16 a tonne. The miner may well be at just about breakeven prices now.

Miners can’t operate if they continue to consistently report losses and will eventually go bust, unless they draw on existing reserves of cash, raise debt or issue more shares, or raise capital some other way. The other alternative is to lower costs, but many junior miners are already well down that path, and may not have anything left to cut.

One dangerous alternative is to only mine their high-grade ore, rather than a mix of high and low-grade ore, but that could see the miner badly exposed down the track, with a higher percentage of low-grade ore that may be worth very little to anyone else.

Foolish takeaway

We may be very close to the point where one of our listed junior iron ore miners hits the wall. We also think prices have further to fall, which could leave just three miners in the world operating profitably – Rio, BHP and Brazil’s Vale. While some investors might not want to sell their shares in the miners thanks to hefty paper capital losses, it pays to remember that prices can always fall 100% from here.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks 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 policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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