Iron ore miners get a boost from weak Australian dollar

July 24, 2013

BHP Billiton, Rio Tinto and other major iron ore miners have gotten a boost from the recent decline in the Australian dollar, the Wall Street Journal reported.

The Australian dollar has slipped 11 percent in the past three months, falling to around US92 cents, boosting the bottom line of some of the country’s largest mining companies.

The larger iron-ore producers, who tend to report results in U.S. dollars, are benefiting from the resulting sharp drop in Australian costs, such as wages and taxes. Their smaller rivals, meanwhile, are getting a boost when repatriating their U.S.-denominated earnings.

“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,” Matt Riordan, a Sydney-based money manager at Paradice Investment Management told the Wall Street Journal. “The question is where the currency and commodity prices go from here.”

Australia’s mining industry has been hurt by a sharp slowdown in prices of many commodities. That partly reflects cooling economic growth in China, Australia’s biggest trading partner and the biggest buyer of its raw materials.

Iron ore’s price fell below US$96/t ($87/st) recently, less than half the record of US$211.53/t ($191.90/st) reached in early 2011. Despite an uptick in recent weeks, iron ore’s price is still about 17 percent below its high this year, which was reached in February. But in Australian dollars, the price has dropped just 7 percent. Iron ore currently is trading around US$144/t ($131/st), according to the Steel Index.

In recent months, global investors anticipating a pullback in monetary stimulus from Washington drove the U.S. dollar up against other currencies, but the gain against the Aussie was particularly sharp. UBS AG recently lowered its estimate for the Australian dollar to an average of 97 U.S. cents this year from an earlier forecast of US$1.04. Several big producers, including BHP, have canceled or delayed projects, closed mines and placed assets for sale in recent months as commodity prices fell, the Wall Street Journal reported.

For the smaller players, the main benefit from the Aussie’s weakness has been to revenue.

“It goes straight to our bottom line,” Mr. Beyer said. “Apart from diesel fuel, the majority of our costs are Australian-dollar based.”

Mount Gibson last year estimated that a 10 percent drop in the Aussie could add as much as A$1 million to profit.

BC Iron Ltd. Managing Director Morgan Ball said the softer currency helped the company pay lenders almost triple what was required last month.
BHP this year estimated that its annual profit could be bolstered by as much as US$110 million for each one-cent gain in the U.S. currency against the Aussie. That should ensure a significant boost to its earnings, given that the Australian currency has fallen from as high as US$1.06 this year. BHP and Rio Tinto announced record iron-ore production from their Australian mines last week.

There is no guarantee that the Aussie will remain near its current level or fall further, however, and iron-ore prices are vulnerable to further declines after a bumpy year so far.


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