Fat profit margins make iron ore the apple of miners' eyes

SYDNEY Thu Jan 24, 2013 3:18am EST

SYDNEY Jan 24 (Reuters) - Australian miners like to say iron ore is the new gold. How about the new iPhone?

Iron ore, needed to make steel, long ago replaced gold as the most profitable mineral to mine in the Australian outback. And while sales of iPhones have become a disappointment for Apple Inc, mega-mining companies such as BHP Billiton are projecting strong growth in iron ore sales for decades to come - at margins even an Apple or smartphone rival Samsung Electronics would drool over.

BHP and rivals Rio Tinto and Fortescue Metals are seeing profit margins often exceeding 100 percent on sales of hundreds of millions of tonnes of ore.

Apple Inc earned gross margins of 49 to 58 percent on its U.S. iPhone sales between April 2010 and the end of March 2012, according to court filings obtained by Reuters.

Apple on Thursday missed Wall Street's revenue forecast for the third straight quarter as iPhone sales came in below expectations, although earnings topped forecasts.

Production costs under $40 a tonne mean margins at Rio Tinto and BHP are comfortably above any of their other businesses with iron ore selling for nearly $150 a tonne, explaining why they continue to invest to expand their operations in Western Australia's vast Pilbara iron ore belt.

"The margins on iron ore are fantastic," said David Lennox, a mining analyst for Fat Prophets. "These margins will only improve through economies of scale when these companies become even bigger in iron ore."

EXPANSION PLANS

This time next year, Rio Tinto wants to be mining iron ore at a rate of 290 million tonnes a year, up from 253 million in 2012.

Iron ore is forecast to deliver 80 percent of Rio Tinto's 2012 earnings before interest, tax, depreciation and amortization, which is estimated to average around $19 billion, according to Thomson Reuters Starmine data.

BHP this week said it will boost output by 9 million tonnes to 183 million by the end of June.

"We're selling all the iron ore we can mine and still can't keep up," said Nev Power, chief executive of Fortescue, which is aiming to nearly triple output to 155 million tonnes by the end of 2013 to keep up with orders from Chinese steel mills.

All up, Fortescue spends around $70 a tonne to mine and freighter its ore to waiting customers in China. In the last quarter Fortescue sold 18.6 million tonnes of ore for an average $111 a tonne.

Hefty profit margins provide a buffer when iron ore prices hit a down cycle, as they did in September, falling below $90 a tonne from as much as $158 earlier in the year.

Prices have since rebounded to stand around $145 a tonne.

Benchmark 62 percent grade iron ore is forecast to average $125 a tonne this year, according to the median estimate of a Reuters poll of 17 analysts.

But not everyone is sold on iron ore. Hedge fund manager David Einhorn, who famously bet against investment bank Lehman Brothers before it collapsed in 2008, told investors this week he is shorting some iron ore companies, arguing supply is outstripping demand. He did not name the companies.

Einhorn also said he had loaded up on Apple stock.

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