Can the junior iron ore miners survive?

Depleted mines and the low commodity price could see junior iron ore miners fade away

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As if the junior iron ore miners didn’t have anything else to worry about, now Citi analysts suggest they will be squeezed out of the market.

Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI), Mount Gibson Iron Limited (ASX: MGX), Grange Resources Ltd (ASX: GRR), Arrium Limited (ASX: ARI), Mineral Resources Limited (ASX: MIN) and US-listed Cliffs Natural Resources have all been named as producers facing production cuts over the next few years due to depletion of some of their mines as well as the unsustainability of some of their mines at low prices.

Whether driven by price or depletion we expect the number of iron ore companies in Australia to dwindle by the end of the decade,” says Citi.

At the same time, the big miners Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Hancock Prospecting are all expected to increase production over the long term. Hancock Prospecting’s Roy Hill is still ramping up to full production of 55 million tonnes a year, having begun operations late last year.

Citi also raised its forecasts for the commodity price for this year from US$47 a tonne to US$49 a tonne, and projected 2017 would average US$42 – up from their previous forecast of US$39 a tonne.

The investment bank says it remains bearish on the iron ore – despite the short-term upside thanks to better-than-expected Chinese steel output. The bank’s forecasts for 2018 and 2019 are for US$38 a tonne and a modest recovery in 2020 to US$40 a tonne.

Here’s what the iron ore price has been doing over the past 3 years.

iron ore price since 2013 - June 2016
Source: Metal Bulletin data

Those prices would be bad news for the juniors – generally higher cost- producers, and probably spells the end of a number of junior iron ore explorers hopes of coming to market. Those include Brockman Mining, Iron Road Limited (ASX: IRD), Flinders Mines Limited (ASX: FMS), Red Hill Iron Limited (ASX: RHI) and API Management –  which holds a number of joint ventures in the Pilbara.

Foolish takeaway

Given the current commodity price, iron ore mines need to be massive in scale with many years of reserves to get their production costs down – ala Roy Hill. That makes it incredibly difficult for the junior miners and explorers to commercialise their projects and then survive for many decades.

Investors beware.

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