Brazil’s iron ore mining crisis triggered by the deaths of more than 200 people in two dam collapses over the past three years has led to a dramatic increase in profit and share-price forecasts for mining rivals, especially those in Australia.
The loss of production from a number of iron ore projects operated by Brazil’s national mining champion, Vale, has delivered a short-term boost to the price of the steel-making material with a number of analysts forecasting that the increase could last longer than some investors expect.
A rescue worker leads a dog through the damage after a Vale SA dam burst in Brumadinho, Minas Gerais state, Brazil, on Monday, Jan. 28, 2019. Bloomberg© 2019 Bloomberg Finance LP
What could extend the problem into next year is the potential for mines other than those already suspended to be mothballed while all tailings dams, which hold the residue from processing iron ore, are subjected to close safety inspections.
88 Dams To Be Fixed
Credit Suisse, an investment bank, said in a research note last last week that there are 88 mine-tailings dams which “will be required to be removed or strengthened”.
“A time-frame has not been released (for the inspections) but we expect it to be rapid.
“Two villages with nearby upstream tailings dams were evacuated last weekend on worries about stability.”
The crisis in Brazil started in late 2015 when two tailings dams collapsed near the township of Bento Rodrigues killing 19 people. It worsened dramatically late last month when another tailings dam collapsed inundating the town of Brumadinho, killing an estimated 200 people.
8 Vale Staff Arrested
The reaction from the Brazilian Government so far includes the arrest of eight Vale employees responsible for mine and dam safety, a ban on the construction of new upstream dams and the decommissioning of all existing dams over the next two years.
The volume of lost iron ore production is not great, estimated at around 63 million tons from a global market of seaborne ore of more than one billion tons.
More significant is the threat of long-term disruption to Brazil’s iron ore industry which is why the benchmark price of the material has risen by 20% over the past month to trade last week at more than $90 a tonne, before settling earlier today at $88/t.
Forecasts for the rest of the year range from $70/t from the London-based investment bank Liberum to $77/t by Macquarie, an Australian bank.
Vale Shares Down 17%
In the days immediately after the Brumadinho disaster Vale shares fell by 25% on the New York Stock Exchange, but have since recovered a little lost ground to be trading at $12.33, down 17% on the price before the dam collapse.
On the other side of the world, Australian iron ore miners have received a significant boost from the higher ore price and the prospect of a long-term shortfall in Brazilian supply.
Fortescue Metals Group, a pure-play iron ore miner, has seen its share price rise by 33% to $4.50. Rio Tinto, a diversified miner with a big iron ore division, is up 16% to $65.80, and BHP, another broadly diversified, is up 14% to $26.40.
Macquarie reckons the higher iron ore price will boost Fortescue’s earnings in the current calendar year by 40%, Rio Tinto’s earnings by 32% and BHP’s earnings by 21%, with a corresponding increase in the share price targets for each company.
Higher Share Prices For Australian Miners
From an investment perspective the share-price forecasts are possibly more interesting with BHP said by Macquarie to be heading for $29.10 (A$41 on the Australian stock market), Rio Tinto has a price target of $75.25 (A$106), while Fortescue’s target is $5.32 (A$7.50), with all of those price forecasts representing multi-year highs.
Freight wagons filled with iron ore arrive at an unloading facility at Fortescue Metals Group Ltd.’s operations in Port Hedland, Australia. Photographer: Brendon Thorne/Bloomberg© 2016 Bloomberg Finance LP
It could be even better if Brazil’s problems persist.
“There are material upside risks to our base case forecasts under a spot-price scenario despite the upgrades to our forecasts,” Macquarie said.
Chinese Buyers Sidelined
Two factors, other than Brazil’s production decline, will influence the iron ore market over the next 12-to-24 months — the inability of big Australian miners to quickly increase production because they are already operating at capacity, and the expected return of Chinese buyers to the market after a period on the sidelines.
Macquarie said the usual re-stocking of raw material after Chinese New Year had not occurred, yet.
“Right now steel mills are watching the price because it’s too volatile for them to risk buying,” the bank said.
“Our China analyst says China’s return from the extended New Year holidays after the Lantern Festival is next Tuesday (today). We expect this will trigger the pre-Spring re-stock and a price lift.”<donotpaginate>