Simandou: Iron ore’s Amazon moment

Monday, 23 January 2023 — Albert Park

[7 min read]

Dear Reader,

Everybody loves to talk about battery minerals, but iron ore is still where the big money is.

The same month, we have the price going back to more than US$120 a tonne, we also find China pushing deeper into Africa.
The Australian Financial Review reports that the fabled Simandou project in the West African country of Guinea could be a lot closer to fruition than previously presupposed.

Simandou has hung over the iron ore market for years, something akin to the Spanish gold dream of El Dorado.

In this case, it’s not that the Chinese can’t find it, it’s just getting the Simandou ore to port that’s difficult.

The Simandou deposit is 550 kilometres from the coast. And as yet there are no rail lines, bridges, or tunnels to get it there.

The Chinese look set to flex their muscles, at least in terms of money, to build the necessary infrastructure.

Whether Guinea can stay stable and clean to allow the project to start shipping iron ore out by 2025 remains to be seen.

Generally, Aussie investors view Simandou the same way they did Amazon before its arrival here in Australia: with suspicion it’s coming to wreck the party for the incumbents.

I’m not so sure. It’s possible the world needs major investment into the iron ore industry to keep it well supplied.

Here’s a chart I shared with my paid readers in their last monthly report. It shows the major drop off in iron ore capital spending over the last 10 years:

Granted, Simandou is not an Australian project.

But the fact that the Chinese are so willing to fund this suggests iron ore demand could stay robust for the next five years and potentially beyond. That’s a good sign for Australia.

And as stated above, iron ore is back to a booming price of US$120 a tonne.

The profits are huge for BHP, Fortescue, and Rio Tinto at this price. And they make a big proportion of index weighting…hence why the ASX is back very close to all-time highs.

Here’s another thing…both Rio Tinto and BHP released their quarterly production reports this month. Both are running at full speed to basically match what they did last year.

Point being: Everybody is always worried that the iron ore market will go into oversupply and kill the price.

There’s another scenario worth thinking about: that demand for iron ore keeps pressing ahead and the Aussie miners are already too stretched to lift production.

If, for example, coal prices can soar to US$200 or US$300 a tonne, as they did last year, there’s no reason to think iron ore can’t do the same.

Granted, I can’t tell you how likely this scenario is.

But the iron ore majors have been chewing through their reserves for a long time, and the windfall from the juicy price since 2019 has returned to investors in massive dividends…and not new mines.

Many in the market make the same argument about the oil industry, and it’s true for the same reasons.

There’s been little capital investment in future supply, but demand hasn’t gone down in the way people assumed years ago.

For some reason, the same logic is forgotten or ignored when applied to iron ore.

Here’s a bigger issue, as I see it…

The modern world tends to take raw materials for granted as if they just appear for our benefit to make iPhones and Teslas.

If only! Capital needs to be invested, projects financed, staff found, and big risks run. But most of all investors need a ‘narrative’ to believe in.

The previous massive iron ore expansion was built on the expectation of an emerging world giant in China.

Those days are long gone. China’s population is in decline, people believe China has overbuilt infrastructure, and its property market is in crisis.

Good luck convincing investors to invest billions in an iron ore project!

Why bother with that when you can talk turkey until the cows come home about the hot lithium market, or the whizz bang projections around nickel thanks to electric cars.

Coal, again, is the example here. Nobody gave a rats about coal. It was almost socially unacceptable to invest in it.

The consequence was the market went into shortage, the price spiked, and ironically, I suppose, investors who caught on early made massive gains.

Personally, I’ve been buying and recommending some of the iron ore juniors to benefit from this dynamic.

I’m up 6% on one of them, and it’s currently yielding somewhere between 10–20%, depending on how generous management decides to be in terms of the payout.

Again, the iron ore price right now is back over US$120 a tonne. That’s very good margins, with the Aussie dollar bobbing around 70 cents.

And if iron ore goes higher? Those profits will go higher again!

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Every month, I release the ‘Top Five to Buy’ from my current recommendations. I just uploaded it last week. Get started with what you need to know by going here. My favourite iron ore junior is top of the list.

Dear Reader,

‘Let us cross the river and rest in the shade.’

General Thomas ‘Stonewall’ Jackson’s last words

Davos…Davos…Davos.

There’s France’s finance jefe on TV, Bruno Le Maire, wearing a scarf. And there’s the Infosys CEO in a hooded parka. They may have flown in on carbon-spewing private jets…but when they get in front of the cameras, they go green. ‘Turn down the thermostat’ is the message.

The news media is back on the Davos story — riding its usual hobby horses, bowing to its sacred gods, and promoting its favourite bamboozles.

This year, Ms Zelenska, the wife of Mr Zelenskyy, is the queen of the prom. Speaking at the confab, words came out of her mouth and were greeted by wide approval:

‘We are all internally convinced that there is no such global problem that humanity cannot solve…This is more important now when Russia’s aggression in Europe poses various challenges.’

Of course, there are plenty of ‘problems’ humans can’t do much about. Rats in Baltimore. Bores at social functions. Morons in Congress. Few people want to die…but everybody does.

Then, turning to the war:

‘…there are no day offs from war…everyone in Ukraine has to risk their lives every day.’

Of course, that is not true either. Most people in Ukraine are nowhere near the combat zone…and the civilian casualty count is low; Russia has apparently tried to limit the collateral damage. The figures show about 8,000 civilian deaths in the country last year caused by the war. Out of a population of 43 million, that’s a violent death rate of 18 per 100,000.

Volley and thunder

The Russians will have to do a lot more killing than that to equal the violent death rate in American cities. In Baltimore last year, for instance, the rate was 55 — three times as high.

Later in the program, Ms Zelenska’s husband took the stage.

He and his wife must share the same speechwriter. There are ‘no accidents at wartime’, said the man on the podium. He was speaking only a few hours after a helicopter crashed in Kyiv. On board was the Ukrainian interior minister, now dead.

That there are no accidents in war is surely incorrect too. Military history is full of them. In almost every battle, the fog of war is thick with mistakes, lies, and accidents.

In the famous ‘Charge of the Light Brigade’, for example, the English cavalry rode valiantly ‘into the valley of death’, as Kipling put it, in Crimea. (Britain was the US of the era — ready to throw its weight around all over the planet.)

But the Light Brigade was going the wrong way. The commander, Lord Cardigan, had spent so much time out on his private yacht, anchored offshore in the Black Sea, with its own chef aboard, that he was confused by the lay of the land. Lord Lucan, his brother-in-law, whom he detested, ordered him to advance on a Russian gun emplacement and waved his hand generally in the direction to which the Light Brigade later went. Soon, there were indeed cannons to the left of them, cannons to the right of them, and cannons in front of them. All volleyed and thundered. And cut the poor English cavalry to pieces.

The Light Brigade had blundered into the wrong place. And when the dust settled, it had lost more than 200 men and 300 horses. For his part, Lord Cardigan rode all the way up the valley to the Russian guns. The Russian commander recognised him as he rode…the two had enjoyed parties together in London before the war. He told his men not to kill him but to capture him. Perhaps he was looking forward to a more charming dinner conversation. But Cardigan, realising that he was about to be captured, spurred his horse, jumped over the breastworks of the gun emplacement, and dashed back down the valley. Leaving the dead and wounded behind him, he went back to his yacht in time for dinner.

Fatal equations

Take out the accidents, mistakes, and miscalculations, and not much military history would remain. What was Napoleon’s attack on Moscow if not a giant, boneheaded error? Adolf Hitler might have thought that mechanised transport made it possible for him to succeed where Gustavus Adolphus and Napoleon Bonaparte had failed. But the Soviets had machines too. They moved their heavy industry to the East…and when they got rolling, so to speak, they could turn out dozens of tanks in the time the Germans produced only one.

New York Times Economist Paul Krugman writes to say that the secret to war is there:

‘I’m not a defense expert. But I do know something about applied math — and contemporary wars are, to a large extent, about arithmetic.’

And yes, of course, numbers play a part.

But, Paul, riddle us this:

At Rorke’s Drift, in South Africa, 1879, a rag-tag bunch of British soldiers, local militia, and hospital patients were outnumbered by Zulu warriors, 40 to 1. The arithmetic was terrible. But they won. How come?

And Robert McNamara was a numbers guy. He provided detailed statistics, showing our overwhelming superiority against the North Vietnamese. We had more guns, tanks, helicopters, coca cola, and prostitutes in Saigon. Who won?

The same question could be posed about Afghanistan — now in the hands of the Taliban…and Iraq, now run by Muqtada al-Sadr, whose militia killed some 600 US troops after the US invasion. In both countries, the numbers left no doubt; the US would prevail. What happened?

Krugman says Ukraine will win its battle with Russia because it’s backed by NATO, which has bigger numbers. But ‘accidents’ still happen.

Disarmed

One of the most famous of them occurred in central Virginia in 1863. That was when General Stonewall Jackson was riding back to his lines after reconnoitring the terrain for the morrow’s battle. He had just inflicted a stunning defeat on Union troops, in what came to be known as the Battle of Chancellorsville.

The confederates were outnumbered, 2 to 1, but Jackson still managed to split away from Lee’s army and attack the Northerners from the flank. Then, after dusk, Jackson prepared another assault on the demoralised Yankees. Had he been able to follow up, he might have inflicted such a devastating defeat on the Army of the Potomac, that Lincoln might have been forced to make peace.

After the first day of battle, Jackson studied the lay of the land in the twilight and headed back to his camp. But in the half-light, he was mistaken for the enemy. Jackson was hit by three bullets from his own troops. His arm had to be amputated. He crossed the river soon after.

‘You have lost your left arm’, General Lee wrote to him on his deathbed, ‘and I have lost my right’.

But we are not here to quibble with silly talk from Davos. We don’t know why the Ukrainian helicopter crashed. And the only way Zelenskyy can be sure that it wasn’t an accident is if he caused it to crash himself.

Regards,

Bill Bonner,
For The Daily Reckoning Australia