Crash to Rash to Ash

ROADHOUSE COMMENT: The crash of the iron ore price continues to cast a shadow of doom across the Australian Share Market.

The iron ore price enjoyed a bit of a jump this week, but that may not be enough to save those third and fourth tier companies struggling to maintain a toehold in the marketplace.

The latest victim of the iron ore crash appears to be long-time market favourite, Atlas Iron (ASX: AGO), which called a voluntary suspension of its securities this week.

“The voluntary suspension is requested pending the outcome of an extensive review of the company’s operations, financial outlook, asset sale opportunities and capital structure in light of the recent rapid fall in the iron ore price,” the company informed the ASX.

Atlas’ approach to the industry’s collective dilemma received a heavy kicking by industry know-it-alls wearing their twenty-twenty hindsight steel caps.

These are the same know-it-alls who have regularly suggested the iron ore price would not fall any further as they declared US$80 per tonne would be the bottom, as would US$70, US$60, and US$50.

Regular readers of The Roadhouse would remember we called US$40 a tonne well before Christmas and we’re sticking with that prediction.

Nobody, however, has been as rash in their response to the fall as the man who sits in the big chair at Fortescue Metals Group (ASX: FMG), Andrew Forrest, who famously suggested iron ore producers place a cap on production in a bid to bring the price down to enable smaller producers to survive.

Of course, The Roadhouse in no way suggests there may be some collusion by the big boys in the iron ore playground, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), but the conspiracy theorists in the front bar continually suggest FMG’s train set would be a great addition to a combined BHP/RIO enterprise in that it would be able to allow – for a healthy fee – smaller companies a transport corridor to port that would not interfere with their current operations.

The remaining question, however, is who will rise from the ashes of the prolonged price war to ride their product on the rails to distribution Nirvana?

We don’t pretend to be smart enough to make that prediction, so we’ll leave that to the smarter pundits who have handled the price fall so well.

With the resources sector copping such a baking it was interesting to read a recent article in The Age, which suggested mining stocks to currently be at bargain prices, highlighting the recent dividend performance of BHP as an example.

The article quoted a number of industry watchers including a couple of friends of The Roadhouse in Alto Capital senior analyst Carey Smith and Breakaway Investment senior resource analyst Mark Gordon.

Both men commented on the current outlook for mining stocks.

“It’s worth dipping your toes into uranium and nickel stocks but iron ore, coal and gas have further to fall,” Smith told The Age.

“The share prices of BHP and Rio have fallen nowhere near as much as the iron ore price. Nor, for BHP, the oil price. It could drop to $25 or lower,” he warns, though by the same token “trying to time the market never works.”

“I think we’ve reached the bottom,” Gordon said.

“We should start seeing a rise in their share prices but it won’t be dramatic.

“It’s hard to say what the catalyst will be.

“BHP and Rio Tinto have become long-term dividend stocks.

“We’re looking at the smaller end, to decent projects making money and good management.

“We also like the base metals.”

After reading the article The Roadhouse followed both gents up to ask them to expand their thoughts in terms of the exploration sector, which is really feeling the pinch at present.

“Unless you are exploring for graphite or nickel in the Fraser Range, the market is shut, with no interest for exploration companies at all,” Smith bluntly declared.

“The speculative money has moved into tech and biotech stocks.”

Gordon was a bit more diplomatic suggesting a company with a good enough project was always worth keeping an eye on.

“A good project will always be a good project,” he said.

“Whether the market is prepared to appreciate it at any given time is another thing all together.”