Another iron ore miner on the ropes

Gindalbie Metals Ltd (ASX: GBG) has entered a trading halt and shares suspended while the iron ore miner tries to find a way to stay alive.

Gindalbie owns 48% of the $2.5 billion Karara Iron ore project in a joint venture with Chinese steel giant Ansteel. But in an email to its 1,000-strong workforce, Gindalbie reportedly said that funding support from Ansteel would be unable to continue due to the prolonged iron ore price slump. Karara CEO Zhang Zho Yuan told workers the mine was still facing “significant cost pressure and being in a loss position“.

According to Gindalbie’s last quarterly cash flow report, the miner had just $795,000 in cash on its books and was bleeding cash.

Iron ore prices have dropped from above US$180 a tonne to just over US$42 a tonne currently, including halving in 2015.

Given the prospect of lower iron ore prices for some years and the continuing losses, it seems the Karara project is highly likely to cease operations. That follows another high-profile iron ore miner BC Iron Limited (ASX: BCI), which suspended operations at its Nullagine joint venture iron ore mine in the Pilbara with Fortescue Metals Group Limited (ASX: FMG) thanks to the low commodity price.

Other junior miners are in trouble too. Atlas Iron Limited (ASX: AGO) had to renegotiate lower prices with its contractors and issue a large chunk of shares at a big discount in 2015 to ensure it could continue operations.

Grange Resources Limited (ASX: GRR) says it striving for “further cost reductions in the current iron ore market“, and “due to the continued weakness in the iron ore price and subdued pellet demand combined with the optimisation strategy, redundancies may be made“.

Some miners have already collapsed with Western Desert Resources (ASX: WDR) falling into administration in September 2014, Sherwin Iron Ltd (ASX: SHD) in July 2014 as well as a number of unlisted iron ore companies closing up shop. At the time, the iron ore price was around US$82 a tonne.

Clearly, smaller miners are feeling the heat from the massive fall and sustained lower prices for iron ore, and it’s unlikely we’ve seen the end of the carnage just yet. I fully expect prices to fall further from here as more supply is added to an already oversupplied market while demand is expected to fall.

Foolish takeaway

Investors in ASX-listed junior iron ore miners are taking on a huge risk of having their fingers badly burnt. Why take the risk of losing all or most of your investment?


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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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