Cliffs Natural Resources Inc (CLF), African Minerals Limited (AMI): Are Iron Ore Prices’ New Low a Buying Opportunity?

On Friday, May 31st, iron ore prices reached a 7-month low of about $111 per metric tonne. With the price now down 30% from its high of $159 in February, what does it mean for mid-tier producers Cliffs Natural Resources Inc (NYSE:CLF) and African

Minerals Limited (LON:AMI)? What does it mean for the majors Rio Tinto plc (ADR) (NYSE:RIO), BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE)? Are we approaching a buying opportunity for iron ore stocks?

Big 3 Iron Ore Producers Vale, Rio and BHP Have Costs in $50’s Per Tonne

The Big 3 Iron ore producers are perfectly happy with prices of $111 per tonne. In fact, they might even prefer the price to be lower, if it would drive marginal players out of business. Vale and Rio Tinto (NYSE:RIO) are proceeding with plans to increase iron ore production very significantly over the next few years. With costs in the $50’s per tonne in mature, large-scale Australian mines, the majors control the market, as they have for decades.

According to a recent article in the Australian Financial Review, Rio Tinto will increase annual iron ore production from 225 to 300 million tonnes in the next 18 months, and BHP from 180 to 220 million tonnes.

Vale remains the largest producer. It has committed to spending billions to increase production to 360 million tonnes, and has the ability to increase even further to 400 million tonnes a few years later, if market conditions warrant. Vale is the most exposed to iron ore; it gets more than 85% of earnings from that segment.

BHP’s diversified operations will rely more heavily on iron ore over the next five years. BHP is thought to be pulling back on its grand plans in potash. The company’s massive Jansen potash project in Saskatchewan, Canada is likely on hold. In addition, this week BHP outlined further plans to curtail coking coal production. BHP is the largest coking coal producer in the world.

Majors Appear to Be Cutting Global Cap-ex, But Not Iron Ore Cap-ex

This leaves Cliffs and African Minerals Limited (LON:AMI) in a tight spot compared to the majors. Cliffs Natural Resources Inc (NYSE:CLF) is a bull-market iron ore play. About one-eighth of Cliffs Natural Resources Inc (NYSE:CLF)’s production comes from U.S. coking coal, but that segment is worse off than the company’s iron ore business. At sustained prices of $120 per tonne or more, Cliffs Natural Resources Inc (NYSE:CLF)’s iron ore business works well. Below that, it’s a struggle. Cliffs Natural Resources Inc (NYSE:CLF)’ needs higher prices in order to reduce its burdensome $3.7 billion of debt.