My brother in-law is an exploration driller. He’s one of the people that dig the test holes for mines.
He’s been doing this work for over a decade now and he loves it. Mostly because he works in some of the most remote parts of Australia.
You see, to us city bound folk, there’s remote — which is no mobile signal — and then there’s the ‘livin’ on the land’ sort of remote. My in-law, or out-law if you like, works in some of the most isolated places in Australia. Making a phone call can take hours. Often it involves a two or three hour, four-wheel drive trip to reach a place where a satellite is known to pass. Once there, he has to sit and wait another couple of hours for the big satellite to sail overhead.
Only then, can he pick up the sat-phone and make a ten minute call home to his family.
But like I said, he loves it.
Well, most of the time…
This year’s wet season in the top end, meant he was stuck on site for about six weeks. His normal roster is two to three weeks.
The roads (if you can call them that) were covered in about two metres of water. Making matters worse, the flooding meant some drill sites couldn’t be accessed. That meant he and his work mates sitting around doing nothing in 40 degree heat and 100% humidity. They just had to sit it out in the dusty red desert and wait for someone to reach them to let them know the road had opened back up.
As it turns out, this bad weather did more than just prevent my brother in-law from getting home to his kids.
Rio Tinto [ASX:RIO] didn’t like the wet season either. On Tuesday, it reported a decline in iron ore output for the third quarter. The bad weather in the Pilbara was to blame.
The Australian was trying to give investors a heads up by reporting:
‘Severe tropical cyclone Christine closed Rio Tinto’s Pilbara ports and coastal rail operations in late December. Heavy rainfall associated with this cyclone and other adverse weather conditions in January and February impacted across mine, rail and port operations.’
However, the results weren’t that bad.
Iron ore output was 66.4 million tonnes. Lower than the 70 million Bloomberg analysts expected. Compared to last quarter, ore output was down 6%. Yet it was 8% higher year-on-year.
But the market clearly didn’t care. On Tuesday, Rio ended the day higher.
It appears that the market took this fall in production in its stride. That’s partly because the heads of Rio confirmed that the company was still on track to produce a massive 290 million tonnes of ore this financial year. That’s up from 266 million tonnes of ore the year before.
You see, as Rio plans to increase production this year to almost 300 million tonnes, the market could have reacted to the bad weather as a setback.
What also wouldn’t have helped market sentiment is the ABC news report (based on data from the Bureau of Resources and Energy Economics data) predicting a 30% fall in ore prices over the next few years.
In spite of the bad information, Rio stocks still rose. And I wasn’t surprised. Why?
You see, Jason Stevenson, resource analysts of Diggers & Drillers doesn’t think the iron ore price is going to fall anytime soon. Since the ABC report came out, iron ore has risen from $104 per tonne to US$117.
In fact, Jason made the case for Diggers & Drillers subscribers to invest in iron ore as the ultimate contrarian play. As he wrote:
‘The Chinese growth story is likely to continue for years to come and the heads of the iron ore divisions at BHP and Rio agree. They believe that Chinese iron ore demand will remain stable at one billion tonnes per year by 2025.’
One billion tonnes isn’t such a stretch. Last year, Jason reckons over 870 million tonnes of iron ore was exported to China.
So why does that give him confidence that ore prices will remain stable? Jason explained there are three pillars in that matter in the middle kingdom when it comes to iron ore prices: stimulus, pollution, and China’s shadow banking economy.
Jason reckons it’s only once you understand the role these three pillars play in the middle kingdom, that you can understand exactly why iron ore prices aren’t going down for a while yet.
Shae Smith+
Editor, Money Weekend
