Aussie Drop Gives Relief to Iron-Ore Miners

   By Rhiannon Hoyle 
 

SYDNEY--Slugged by weaker prices, spiraling costs and simmering anxiety over China's economic slowdown, Australia's iron-ore producers are finally getting a welcome shot in the arm.

The longest slide in the Australian dollar since the financial crisis is lifting the bottom line of companies from BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RIO) to smaller players like Atlas Iron Ltd. (AGO.AU) and Mount Gibson Iron Ltd. (MGX.AU) that export the key steelmaking ingredient.

The so-called Aussie has slid 11% in the past three months to around 92 U.S. cents--having soared above parity with the U.S. dollar in 2010 and traded near historic highs for much of the past three years.

The larger iron-ore producers, which tend to report in U.S. dollars, are benefiting from the resulting sharp drop in local costs like wages, while their smaller rivals are getting significantly more income when repatriating their U.S.-denominated earnings into the local currency.

In both cases, the impact of the weaker dollar is likely to feed through into the profits of Australia's iron-ore producers, many of which are due to report earnings next month.

"We've had a period where the Aussie held up very strongly and really took some time to catch up with what commodities have done, so this is no doubt a positive," said Matt Riordan, a Sydney-based money manager at Paradice Investment Management. "The question is where the currency and commodity prices go from here."

Once the engine of Australia's economy, helping the nation stave off a recession during the global financial crisis, the mining industry overall has been hurt by a sharp slowdown in prices of many commodities as China's economic growth has cooled. Industrializing China is Australia's biggest trading partner and the biggest buyer of its raw materials.

Despite a small uplift in recent weeks, iron-ore prices remain well below their peaks in early 2011 and are about a fifth lower than their high this year. At the height of worries about a hard landing in China last year, the price fell below US$87 a ton, compared with a record high US$191.90 a ton. The falling Aussie has helped offset some of that weakness.

The Australian dollar has declined more sharply than most others in recent months as global investors anticipated a pullback in U.S. fiscal stimulus while the economy there showed signs of improving, driving up the greenback. UBS AG recently lowered its average 2013 estimate for the Australian dollar to 97 U.S. cents, from an earlier US$1.04 forecast.

Several big producers, including BHP, have canceled or delayed projects, closed mines, and placed assets for sale in recent months as commodity prices fell and shareholders demanded better returns. In addition to lowering labor costs, the lower Aussie has reduced the local tax burden for such companies.

For the smaller players, the main gain has been on the revenue side.

"It goes straight to our bottom line," said Jim Beyer, Mount Gibson's chief executive said in an interview. "Apart from diesel fuel, the majority of our costs are Australian-dollar based."

Earlier this year, BHP estimated that its own annual profit may be bolstered by as much as US$110 million for each 1 cent gain in the greenback against the Australian currency. That should ensure a significant boost to its earnings given how much the Aussie has fallen from its US$1.06 high this year. Both BHP and Rio Tinto announced record iron-ore production from their Australian mines last week.

The benchmark iron-ore price is trading close to US$131 a metric ton currently, according to The Steel Index, which compiles regular data.

"With today's exchange rate, it is A$143 a ton," compared with around A$127 a ton three months ago, said Mount Gibson's Mr. Beyer. "The drop in the Aussie dollar is effectively giving us a A$16-a-ton free-kick. That's very good news for us."

At its full-year result last year, the company estimated that a 10% drop in the Aussie could add as much as A$1 million to its bottom line. Exactly how beneficial the recent falls have been will become clearer when iron-ore producers report half-year or annual earnings next month.

BC Iron Ltd.'s (BCI.AU) managing director, Morgan Ball, said the softer currency helped accelerate debt repayments last month, when it paid lenders almost triple what was required.

The future is more difficult to evaluate. Not only is there no guarantee the Aussie will remain at current levels or fall further, iron-ore prices are vulnerable to further declines. Already, they are down about 10% since the start of the year and 17% lower than this year's February high of $158.90 a ton.

Some commodity analysts have said they see iron ore slumping to $90 a ton, or less, as supply increases and China's growth continues to soften. UBS analysts say they expect iron ore to average $100 a ton between July and September this year, down from an average US$118 a ton in the preceding three months.

- Stephen Bell in Perth contributed to this article.

Write to Rhiannon Hoyle at [e-mail]