Iron ore prices fell 0.3% overnight to US$41.19 a tonne, continuing its six-day losing streak and is headed lower.
That’s despite a 16.5% rally from mid-December from a record low level of US$37 a tonne. The benchmark price has now lost more than 7% over the past six trading sessions.
ANZ’s commodity strategists see iron ore sliding further in the weeks ahead, trading between US$35 – US$40 a tonne, but say that the probability of prices falling below that range is rising daily.
Not only is that bad news for Australia’s junior iron ore miners, but it’s also bad news for the Federal budget, which had forecast an average price of US$39 a tonne over the 2016 fiscal year.
We’ve already seen BC Iron Limited (ASX: BCI) suspend operations at its joint venture Nullagine mine with Fortescue Metals Group Limited (ASX: FMG) and Gindalbie Metals Ltd (ASX: GBG) announce that it is unlikely to be able to continue as a going concern if its partner Ansteel withdraws funding for its Karara mine.
A number of smaller iron ore producers and explorers have collapsed while a large number of billion-dollar iron ore projects have been shelved.
Atlas Iron Limited (ASX: AGO) was forced to renegotiate contracts with its mining services and transport contractors, as well as raise capital to shore up its balance sheet, but is still at high risk of falling over. Atlas still has US$135 million (~A$188 million) of term loan debt, but did expect to have between $85 and $95 million of cash on hand at the end of December 2015, before making a US$10 million payment on its debt.
Atlas reports that its full cash costs are expected to be between $55 and $59 a tonne (US$38.50 to US$41.30) for the 2016 financial year, suggesting the company will struggle to make a profit this year.
Investing in the junior iron ore miners now is likely a foolhardy move, with a high risk of lower share prices and the potential for more to shut up shop. You have been warned.
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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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