Iron ore names bounce in Australia Discovery draws interest

The iron ore price continues to improve from its recent lows, and is now comfortably above the psychological US$100 per tonne level. The most common reference price quoted by the market – not the best measure, but one that many traders rely upon – was back above US$110 per tonne. If recent gains can be sustained the next test level might come in around US$120.

Many have regarded US$120 per tonne of iron ore as a floor price, when taking into consideration the operating and capital costs of bringing on new production across the globe. Australian producers like Fortescue Metals and Atlas Iron saw generous rallies in their shares today as part of a recovery from recent lows.

The iron ore price is not just important for Australian producers – it is a good indicator of Chinese appetite for the raw material – commonly used in the manufacture of steel. We have previously extensively discussed the impact of the steel manufacturing industry in China on the overall social fabric that holds everything in place in our note entitled “Is the Chinese growth story over?”

The rally in iron ore prices also corresponds with a solid copper price, last settling around US$3.75/lb. The next upward leg could test US$3.90/lb and if that breaks a rise above US$4/lb is likely before the end of the year. Still, the current price is welcomed by many producers like Oz Minerals listed in Australia, which averages around US$1.20/lb in production costs.

Discovery Metals subject to takeover

The solid copper price is also drawing interest for emerging copper producers like Discovery Metals. Discovery recently commenced production at its Boseto Copper Project in North West Botswana. Discovery Metals has prospecting licences covering 11,872 km. The $ 1.70 implied offer price by Cathay Fortune Corporate and China-Africa Development Fund is a nice premium to the 30-day volume weighted price, which by the way tumbled after a capital raising at $1.20. The intention to acquire this business shows growing interest from Chinese investors for high quality copper bodies like Boseto and could signal more M&A interest in similar companies looking at breaking into production over the next year or so. Discovery shares were last trading at $1.65 in Sydney.

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