Much bigger producers such as Rio Tinto, BHP Billiton and Fortescue are largely insulated from the price crash because of their lower cost of production. But investors are increasingly wondering whether the price decline will also squeeze plans by BHP and Rio to step up shareholder returns, and Fortescue’s plan to slash its debt levels. The federal government would also have to pencil in lower tax receipts.
More immediate pain is being felt by the workforce at Cairn Hill, 55km southeast of the opal mining town of Coober Pedy. Operations at Cairn Hill — where production started in December 2010, when iron ore prices hit a bonanza $US170 a tonne — were stopped on Wednesday, affecting 200 jobs.
Martin Lewis from Ferrier Hodgson has been appointed administrator of the mine’s operating company, Termite Resources. Termite is owned 51 per cent by ASX-listed IMX Resources and 49 per cent by China’s Taifeng Yuan Chuang International.
Mr Lewis said in a statement that it was too early to assess the outcome of the administration. He confirmed the operation had been shut down.
“Negotiations with key stakeholders and suppliers are continuing and we expect a final decision on the future of the mine and its 20 permanent employees will be made in the coming days,’’ Mr Lewis said.
IMX said that all undisclosed contractual liabilities for Cairn Hill mine were the obligation of Termite, except for a guarantee provided by IMX under the port-handling services contract with Flinders Ports. “This guarantee is capped at $3 million. IMX has held preliminary discussions with Flinders Ports and is confident that a mutually acceptable solution can be reached, should there be any claim under the guarantee,” the company said.
Mine capacity at Cairn Hill is 1.7 million tonnes per annum of a magnetite-copper product.
The joint venture reported negative cashflow from operations of $1.4m in the March quarter. All up, costs in the quarter were $104 a tonne.
On last year’s average prices, the margin for the business was healthy. But it has since been wiped out by iron ore’s price fall.
The joint venture only announced a life extension for Cairn Hill in April. IMX chief executive Gary Sutherland said that had been based on consensus at the time (by more than a dozen analysts and commodity forecasters) that iron ore would trade at $US120 a tonne.
Consensus around the exchange rate was for a future price of US90c. But the dollar has held on to its revenue-sapping higher levels, and was at more than US94c yesterday. IMX shares fell 37 per cent to 2.5c, valuing the company at $9.9m.
The company’s other interest is a big-spending nickel exploration hunt funded by Chinese-controlled MMG in Tanzania.
SA Treasurer Tom Koutsantonis said the resources sector had faced fluctuating commodity prices and a high dollar.
He said SA had done much to grow the industry “but we recognise we can and we must do more”. Another $44m in resource sector initiatives was contained in SA’s budget yesterday.
Despite the iron ore price plunge, the Reserve Bank yesterday said growth in infrastructure investment in China is likely to remain strong for some time, which will have a positive impact on Australian commodity exporters
