After months of languishing at around $50 a tonne, the price of iron ore has jumped this year to levels not seen for around 10 months.
Yesterday, the price of iron ore with a 62% iron content jumped 3.1% to $64.77 a tonne, a level not seen since June 12 2015. And if the price pushes higher to $66 a tonne, the market will be at levels last seen in January 2015.
And after these recent gains, iron ore prices have recovered by around 69% since hitting a record low $38.30 in December. Year-to-date prices are up by approximately 50%, a rally that seems to have been driven by increasing demand for steel from China.
Broadly good news
Rio Tinto has some of the lowest iron ore production costs in the world. On average the company can produce a tonne of ore for $25 to $30 (even less at some mines), so over the past few months Rio’s operations have become significantly more profitable as the price of iron ore has traded over $60 per tonne.
A quick calculation shows that if Rio’s production cost was $30 a tonne back in December when iron ore was trading for $38.30, the company was pocketing around $8.30 per ton in operating profit. Assuming the same production cost today, the company could be pocketing as much as $34.77 per ton in operating profit — that’s a near 320% increase. I need to make it clear that these figures are just rough estimates and exclude a number of other costs, but they clearly illustrate how Rio is set to benefit from the higher iron ore price.
Higher iron ore prices will also help Anglo American, which is currently struggling with its high debt load and high costs at its Kumba Iron Ore mine, the world’s largest iron ore mine.
Anglo, which is still reeling from a $5.6bn loss last year, is weighing up options for its controlling stake in Kumba Iron Ore Ltd, and Minas-Rio, one of the world’s largest mining projects and Anglo’s most expensive ever. The company spent $14bn to buy and build the Brazilian mine. The current rally in iron ore prices will take the pressure off Anglo to complete asset sales and generate cash for a short period. Higher prices may also attract bidders for its iron ore assets, as well as more attractive offers from potential buyers.
India’s Vedanta, another miner that’s plagued with high levels of debt, is said to see a double benefit from the jump in iron ore prices this year.
Indeed, at the end of February, the government of India announced that it would be scrapping the 10% export duty on low-quality iron ore fines and the 30% export duty on low-quality iron ore lumps. According to the government, these moves were made to enable miners to sell-down inventories to free up cash at a time when the mining industry is under severe pressure. Now that iron ore prices are close to 12-month high, Vedanta will be able to make the most of this rule change to boost its financial position.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.