Less new production capacity of the four major mines in the short term the supply increment will be gradually reflected in the second half of 2021.

SMM News: at present, the supply of iron ore in the world is an oligopoly, and the supply advantages of the four major mines are obvious. The big four iron ore producers are Australia's Rio Tinto, BHP, FMG and Brazil's Vale (Vale). In the iron ore bull market from 1919 to 2020, the profits of the four major mines further improved, with a profit margin of 58% and 70% for the iron ore business.

Further improvement in profitability

Vale

In the first half of 2020, Vale's net operating income was US $14.49 billion, or-16.7% compared with the same period last year, mainly affected by the COVID-19 epidemic and the less-than-expected resumption of production due to a mining accident, and iron ore sales were-13% compared with the same period last year. Due to the reduction in expenses related to the mining accident, Vale's profitability rebounded sharply in the first half of 2020, with profit before interest, tax, depreciation and amortisation of US $6.253 billion, + 582% year-on-year, and profit margin of 43%, up 15 percentage points from 2019. Due to the huge expenses of the mining accident, the asset-liability ratio of Vale has risen, and as of June 30, 2020, the asset-liability ratio of Vale was 60%, up 11 percentage points from the end of 2018.

In recent years, the share of Vale's iron ore business revenue has been increasing, with iron ore business revenue of US $10.915 billion in the first half of 2020, accounting for 75.3% of the total revenue, up 13.5% from 2015. From the perspective of the profitability of iron ore business, the profit margin of iron ore business is also higher year by year, which is higher than the overall profit margin. In the first half of 2020, the profit before interest, tax, depreciation and amortisation was US $50 / ton, with a profit margin of 58%, an increase of 26.4% over 2015; and the profit before interest, tax, depreciation and amortization of pellets was US $69 / ton, with a profit margin of 56%, an increase of 14.8 percentage points over 2015. In recent years, due to China's strong iron ore demand, China is the main sales place of Vale iron ore. In the first half of 2020, Vale's iron ore sales to China accounted for 64.2% of its total iron ore sales, up 3.33% from the same period last year and 10.6% from 2015.

Rio Tinto

In the first half of 2020, Rio Tinto had total sales of US $20.333 billion,-6.7 per cent year-on-year, and iron ore business revenue of US $11.47 billion, accounting for 56.4 per cent of total sales, or + 2.3 per cent year-on-year. COVID-19 epidemic has little impact on Rio Pilbara iron ore production, Rio Tinto Pilbara iron ore sales of 160 million tons in the first half of 2020, + 3.27% year-on-year.

In terms of profitability, in the first half of 2020, Rio Tinto's total profit before interest, tax, depreciation and amortization was US $9.64 billion, which was-6% compared with the same period last year, and its profit margin was 47%, which was flat compared with the same period last year; the iron ore business before interest, tax, depreciation and amortization was US $7.698 billion, with a profit margin of 67% and a year-on-year decline of 0.24%. Among them, the profit margin of the Pilbara iron ore business is 72%, and the iron ore business is profitable. Free cash flow in the iron ore business was $4.3 billion, down 7 per cent from the first half of 2019, mainly reflecting higher capital expenditure. This includes an increase in continued capital and an increase in construction activity for the Koodaideri project. Although Rio Tinto's total asset-liability ratio has fallen from 2015, the debt ratio has risen slightly in the past two years. As of June 30, 2020, the total asset-liability ratio was 48.35%, up 3 percentage points from the end of 2018 and 3.5 percentage points lower than 2015.

FMG

In fiscal year 2020, FMG's total revenue was 12.82 billion US dollars, + 28.7% year-on-year; iron ore business revenue was 11.58 billion US dollars, accounting for 90.3% of total sales revenue, + 31.8% year-on-year. As a result of its successful operation and marketing strategy, FMG exceeded its 2020 fiscal year transport target and sold 178 million tons of iron ore in fiscal 2020, + 6% year-on-year.

In terms of profitability, in fiscal year 2020, FMG's total profit before interest, tax, depreciation and amortisation was $8.375 billion, + 38.5% compared with the same period last year, and the profit margin was 65%, up 4 percentage points from the same period last year. FMG's total asset-liability ratio as a whole continued to decline. As of June 30, 2020, the total asset-liability ratio was 43.4%, down 2.8% from the same period last year and 21.4% lower than in 2015.

BHP

In fiscal year 2020, BHP's total revenue was $41.7 billion,-6% compared with the same period last year; iron ore business revenue was $20.86 billion, accounting for 64% of total sales revenue, + 21% year-on-year. In fiscal year 2020, iron ore sales were 283 million tons, + 4.8% year-on-year; output was 281 million tons, + 4.2% year-on-year, successfully completing the annual production plan.

In terms of profitability, in fiscal year 2020, the total profit before interest, tax, depreciation and amortization of BHP was $22.1 billion,-4.57% year-on-year, and profit margin was 53%, up 1 percentage point from the same period last year; iron ore business before interest, tax, depreciation and amortization was $14.6 billion, + 31.4% year-on-year, and profit margin was 70%, up 5 percentage points from the same period last year. The total asset-liability ratio of BHP has increased in recent years. As of June 30, 2020, the total asset-liability ratio was 50.1%, up 1.5% from the same period last year and 6.8% from 2015.

Keep the cost of the mine low as a whole

The cost of Vale iron ore rose slowly. In the second quarter of 2020, the C1 cost of Vale was 17.1USD / tonne, which was-0.45USD / tonne, up 2.70 US dollars / tonne compared with 2015; the complete cash cost to China was 42.2US dollars / tonne, which was + 0.90 US dollars / tonne year-on-year and 5.8USD / tonne higher than 2015.

Rio Tinto's iron ore costs remained stable as a whole, with C1 costs of $14.5 / tonne in the first half of 2020, + $0.1 / tonne year-on-year and $0.4 / tonne in 2015.

The cost of FMG iron ore continued to decline. In fiscal year 2020, C1 cost was US $12.94 / wet ton, which was-0.17 US dollars / wet ton year-on-year, a decrease of US $14.06 / wet ton compared with 2015. The complete cash cost to China was US $25 / ton, year-on-year + US $1 / ton, a decrease of US $13 / ton compared with 2015.

BHP iron ore costs also continued to decline, with C1 costs of US $12.63 per tonne in fiscal 2020, compared with-1.53 US dollars per tonne and down 6.37 US dollars per tonne from 2015.

Little capital expenditure on new capacity

With the rise in mineral prices, although the capital expenditure on iron ore in the four major mines has increased, it is still significantly lower than that in 2011-2014, and is dominated by capital expenditure to maintain existing production capacity.

In the past five years, the overall capital expenditure on iron ore in the four major mines has dropped significantly compared with 2011-2014, with a total capital expenditure of $6.47 billion in 2019, + 14.3 per cent year-on-year and 76 per cent lower than the peak in 2013. From the perspective of capital expenditure structure, it is mainly the capital expenditure to maintain the existing capacity, while the capital expenditure for new capacity is less. Take Vale as an example, the capital expenditure on iron ore business totaled US $2.07 billion in 2020, of which the capital expenditure on new capacity was US $385 million, accounting for 18.6%. In 2012, the capital expenditure on iron ore business totaled US $7.882 billion, of which the capital expenditure on new capacity was 5.75 billion yuan, accounting for 72.9%. Capital expenditure on new capacity has declined significantly both in absolute terms and in proportion.

The picture shows the capital expenditure of the iron ore business of the four major mines.

The picture shows the total capital expenditure and growth rate of iron ore business in the four major mines.

From the perspective of specific future mine production projects, there will be more projects to be put into production in the next two years, mainly to maintain the existing production capacity.

There are many new projects in Vale.

The Northern System 240 million ton project, with a total investment of US $772 million, plans to expand the iron ore powder production and logistics capacity of the North system. The total production capacity of the North system will reach 240 million tons by the end of 2022, considering that the output of the North system will be about 200 million tons by 2020, and there will be a large increase in the production of the North system after 2022.

In September 2020, Vale's board of directors approved the Nanling 120 project in Caracas, Para, Brazil, which will increase the annual production capacity of the Vale S11D mine and concentrator by 20 million tons to 120 million tons, thus further increasing the annual production capacity of the northern system to 260 million tons. The project, with a total investment of US $1.5 billion, is expected to be put into production in the first half of 2024.

The Gelado project, with a total investment of US $428 million, produces pellets with 64.3% iron content and is expected to be put into production in the second half of 2021.

Rio Tinto's new projects mainly replace aging capacity.

The West Angelas and Robu Valley mines in the Pilbara region of Western Australia, with a total investment of US $800m, will be put into production in 2021, mainly to maintain Pilbara Blend and Robe Valley capacity.

The Koodaideri mine in the Pilbara region of Western Australia, with a total investment of US $2.6 billion and a production capacity of 43 million tons, will also support Pilbara Blend production when it comes into operation in 2022.

New production capacity of BHP

The new production capacity of BHP is mainly the South Flank project, with a total investment of US $3.1 billion and a production capacity of 80 million tons, which will be put into production in mid-2021, while the Yangdi mining area with an annual production capacity of 80 million tons will reach the mining life., South Flank will be used as a backup project for Yang Di. The iron ore grade produced in the South Flank area will reach 62% Murray 63%, and the iron grade in the Yangdi mining area will be about 56%, so the, South Flank project will significantly improve the iron ore grade produced by BHP in the Pilbara area.

FMG's new projects are mainly Eliwana and Iron Bridge

The Eliwana project, with a total investment of US $1.4 billion and a production capacity of 30 million tons, will increase the annual production capacity of West Pilbara Fines to 40 million tons. It is scheduled to be put into production in December 2020 to replace the Firetai mine, which will help to maintain the low cost of FMG with a minimum annual output of 170 million tons for 20 years.

The Iron Bridge project, with a total investment of US $2.6 billion, produces 67 per cent of high-quality magnetite with an annual capacity of 22 million tons, and is scheduled to start production in the first half of 2022.

The picture shows the total amount of iron ore shipped in Australia and Brazil (in 10,000 tons)

The picture shows the volume of iron ore shipments in Brazil (5-week moving average, 10,000 tons)

The picture shows Australian iron ore shipments (5-week moving average, 10,000 tons)

The picture shows the seasonal price trend of 62% Platts index of iron ore (in US dollars / ton).

Summary

In the iron ore bull market from 1919 to 2020, the profits of the four major mines further improved, and the profit margin of the iron ore business reached 58%. The iron ore business is the main business of the four major mines and the most profitable business. With the rise in mineral prices, although the capital expenditure on iron ore in the four major mines has increased, it is still significantly lower than that in 2011-2014, and is dominated by capital expenditure to maintain existing production capacity. The increase in iron ore production in the next two years mainly comes from two aspects: on the one hand, the production of Vale mines has been suspended due to mining disasters, with about 40 million tons of production capacity to be restored, which is expected to accelerate recovery in the second half of 2021; on the other hand, the commissioning of new mines, mainly including Eliwana, Iron Bridge and South Flank, is mainly to replace aging mines, which is expected to bring some increment. On the whole, the new production capacity of the four major mines is relatively small in the short term, and the supply increment will be gradually reflected in the second half of 2021.

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