Iron Ore : If you want to play with matches, then stay away from the petrol can
On an all in sustaining cost basis, all Australian iron ore producers outside of BHP and RIO are losing money at the current spot price. But more 'urgently', all bar 2 producers (with a question mark over a 3rd) are losing money on a cash cost basis. And at least half of these companies carry a high level of debt. As we have seen with Atlas Iron Ltd, this can be a potentially explosive combination. For those so inclined to 'play with matches', we would hence emphasise that they closely review the NET debt position of their investment. On our numbers, companies that have challenging debt profiles include Gindalbie, Citic Pacific (private), Arrium and FMG. On the flipside, those with strong balance sheets include Mount Gibson, Grange, Mineral Resources and BC Iron. However, if the iron ore price fails to bounce in the next 12 months then 2 of these will also come under pressure. We continue to see this sector as one to avoid, but if you are inclined to play with matches, then stay away from high debt!
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Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.