The Gold Report: You are based in Australia where iron ore and coal are the dominant mined commodities. A recent Morgans research report said, “We need to see demand-linked data improve, or at least stop getting worse, for the Chinese steel industry for us to gain any confidence” in iron ore market fundamentals. Has there been any improvement?
James Wilson: Companies with resilient supply, coupled with the remarkable cost-out performance of Vale S.A. (VALE:NYSE), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX), Fortescue Metals Group Ltd. (FMG:ASX), Roy Hill (private) and subsidized Chinese domestic iron ore production, will lower the long-term sustainable price level needed to encourage new investment in iron ore supply. We estimate this has reduced the long-term sustainable iron ore price from US$85/ton (62% Fe) to US$65/ton, capping the upside potential of any eventual recovery. As a result, we expect those miners burdened with high levels of debt like Fortescue or large leverage to iron ore like Rio Tinto will remain under pressure. Our preference remains with BHP, which maintains competitive exposure to iron ore but is significantly boosting free cash flow across its business, coupled with attractive leverage to oil and gas, one of our preferred commodity exposures.
TGR: The World Gold Council says Australia is second only to China in global gold production. How is a weak Australian dollar compared to the U.S. dollar changing the fortunes of the country’s gold miners?
“A weak Australian dollar means strong leverage for domestic gold producers.”
JW: A weak Australian dollar means strong leverage for domestic gold producers. At the start of the June quarter, the gold price in Australian dollars hovered around AU$1,500 an ounce ($1,500/oz), which is great considering the average “all-in sustaining cash cost” was around AU$960/oz in the March quarter compared …read more