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What Impacts Iron Ore Miners’ Break-Even Costs?

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Oct. 15 2015, Updated 1:06 p.m. ET

Quality considerations

Depending on the iron ore grade, moisture content, impurities, and product mix (fines, lump, and pellets), the prices realized by iron ore miners vary widely. For example, while BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) have grades averaging close to 60%–61% with a fines-to-lump ratio of close to 2:1, Fortescue Metals Group (FSUGY) has grades below 58% with 100% fines production.

Due to these differences, BHP and RIO generate higher realized prices compared to Fortescue. BHP and Vale SA’s (VALE) joint venture, Samarco, mainly produces pellets, which get a premium of close to $30 per ton. To learn more about iron ore product types, please read Must-know: An overview of the iron ore industry.

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Cash costs

Cash costs mainly include labor, energy, consumables, contractor and external services, and various other costs. Depending on geography, geology of the mine, and economies of scale, these costs also vary widely between companies.

According to their latest published results, while RIO, BHP, and Vale had free on board (or FOB) cash costs per ton of $16.20, $17.00, and $15.80, Cliffs Natural Resources’ (CLF) Asia–Pacific division’s costs were much higher at $34 per ton. BC Iron, Atlas Iron, and Minas Rio also rank on the higher side on these costs. Royalties and maintenance capital expenditure are the other costs impacting miners’ FOB costs.

Freight

Miners’ geographic location also serves as a big differentiator in terms of their final delivered price. Australian producers are more advantageously located—closer to the biggest seaborne markets (mainly China)—than their Brazilian peers. While the current freight cost per ton from Australia to China is close to $6 per ton, Vale spends close to $16 per ton on delivering the same ton of material to China.

Based on the above factors, BHP and RIO are advantageously placed as far as grades and proximity to market are concerned. While Fortescue is closer to the end market, its grades and only fines production led to a discount on the benchmark prices. Vale has higher grades and a higher proportion of pellets in the mix, however, distance from the major seaborne market is its major handicap. Cliffs, on the other hand, mainly serves US domestic market and has pellets as its main product. CLF forms 4% of the SPDR S&P Metals and Mining ETF’s (XME) holdings.

In the next part of this series, we’ll see how iron ore miners are placed in terms of their cost per ton.

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