London Mining’s shares closed down 77 per cent at 0.70p. The shares have fallen 99 per cent in the past year.
In the week that BHP Billiton announced its intention to become the world’s lowest-cost iron ore miner by ramping up Australian output from 225m tonnes to 290mt annually, the problems at London Mining – with annual production of just 5mt – show the crisis at the other end of the market.
Small iron ore producers are being overwhelmed by a wave of supply from the iron ore market’s traditional oligopoly – led by Vale, Rio Tinto and BHP. Fortescue, another Australia-based iron ore miner, has become a fourth big low-cost supplier in recent years to a global market dominated by Chinese demand.
As a result of the increasing supply, plus moderating demand from China, the price of iron ore has fallen more than 40 per cent this year. For a company such as London Mining, the resulting squeeze is dramatic – at last year’s prices rather than today’s the company could be making at least an extra $200m in revenues.
“This looks like the end of the road for London Mining unless a new investor charges to the rescue,” said Numis analysts.
Barclays analysts said the future for the company’s assets, focused on Sierra Leone, was in the hands of the group’s lenders.
There has been scant sympathy from the bigger miners determined to assert their market power. “Charity starts at home,” Jimmy Wilson, BHP’s iron ore president, said this month. Businesses that “should never have started up anyway” would be hit as lower-cost supply arrived on the market, he added.
West Africa – once expected to become a global hub for iron ore mining, with the vast Simandou deposit in Guinea still to be exploited – is one focal point of the squeeze on smaller miners.
Lured into the market by the strong demand for iron ore over the past decade, many started up relatively recently – London Mining in 2011 – and have yet to expand to the point where they can operate at the scale and cost desired. African Minerals and Bellzone, two other UK-listed miners in the region, are also facing financing problems. Their plight has been exacerbated by the Ebola outbreak.
Other smaller producers have been hit, even in Australia, where Western Desert Resources called in administrators last month.
This year’s price decline is just part of the problem. The other is what one market observer calls “a paradigm shift” in sentiment towards iron ore. Expectations about the medium-term price have shifted substantially down – from about $100 per tonne to about $80/t. Measured against this yardstick, the capital that companies such as London Mining need to grow is unlikely to be forthcoming.
London Mining’s Marampa mine is therefore short of the investment it needs to increase production and drive down unit costs. After investing about $500m in Sierra Leone, the company still needs another $300m to get to its intended level of output. Costs have remained stubbornly high at about $50 per tonne, with the costs of managing the region’s Ebola outbreak adding another $1/t. By contrast, BHP aims to cut mining costs to less than $20/t.
London Mining said it was still hopeful of a cash injection for Marampa to allow it to keep operating. How long such companies could continue to produce was, said Barclays analysts, “key to the final level of the iron ore price in this current period of oversupply”.