Rio Tinto’s (ASX: RIO) quality steel making iron ore Simandou project in Guinea has been described by some as another nail in the coffin of West Australia’s ailing iron ore-centred Pilbara region – which has underpinned much of Australia’s economic growth for decades.
However, from fund manager Romano Sala Tenna’s perspective, the Pilbara is merely having a Mark Twain moment.
Pilbara’s demise overstated
In other words, the portfolio manager at Katana Asset Management believes talk of the Pilbara’s death and decline into a wasteland – as Fortescue Metals (ASX: FMG) executive chairman Andrew Forrest would have it – has been vastly exaggerated.
What triggered talk of the Pilbara’s slow and eventual death was a growing realisation that despite decades of iron left, the good stuff has been mined out.
Fortescue’s Forrest is quick to describe Rio’s iron ore Simandou project as the "Pilbara killer" due to its estimated reserves of 2.4 billion tonnes of ore grading at 65% iron metal.
This makes Simandou's iron ore the quality stuff that the Pilbara used to be renowned for.
Pilbara saver
But Sala Tenna reminds investors that Simandou could – as some commentators are now suggesting - become the "Pilbara saver".
By Rio Tinto’s own admission, the days of 62% iron metal coming out of the Pilbara are gone.
While Rio might still be nudging toward 60%, a lot of the ore its counterparts, Fortescue and Mineral Resources (ASX: MIN) are now spitting out is between 56%-58%.
But what’s been overlooked, notes Sala Tenna, is what's going on in China.
“China's built some very large blending stockyards, and they're planning to take Simandou iron ore deposits coming online in the next five years and blend it together with Pilbara ore to get a higher overall feed for their mills,” Sala Tenna tells Azzet.
“So given their plans to blend these massive stockyards, I'm not as negative on the Pilbara as some are.”
China has blended Rio Tinto iron ore at its Beilun port since 2020.
Since then a growing number of iron ore unloading terminals across China are now capable of blending iron ore - and at the pace of around 3,500 tonnes/hour.
Cost curve
The bottom line, adds Sala Tenna, is where miners sit on both their cost curve and production scale.
He also reminded the market that the "majors" – like Fortescue, Rio and Mineral Resources – probably need to bring in around 40 million tonnes [of ore] annually just to stand still.
Given the state of the Pilbara’s declining assets – comprising very large and very old mines - the challenge for iron ore producers, adds Sala Tenna, is to bring a new mine in pretty much every one to two years, just to maintain production.
“So I think that as the price declines, you'll start to see some of those decisions pushed back, and I think you'll see a natural balancing in the market,” says Sala Tenna.
Price outlook
Like most analysts, Sala Tenna has always been cautious about his iron ore price outlook.
However, with several key factors currently playing out – including the Trump tariff factor - he suspects it could find support somewhere between US$80 to US$85 a tonne -12% below the current price.
“When you’ve got 15% of producers in the red, that’s when you start to see traction in the iron ore price,” says Sala Tenna.
However, he reminds investors that unlike a lot of producers – BHP and Rio Tinto are low cost operations – they are still making good returns well below $50/tonne.
“There's still 250 million odd tonnes of ore produced in China at an average ore grading of 32%; so you can work out the economics and how many tonnes they have to strip to produce a grade in the high 50s,” he says.
“It's a very costly process, so you can still see some more of those tonnes before we really see a collapse in the iron ore price.”
