Despite the dramatic decline in the market’s appetite for the mining sector, market analysts, Investec remain optimistic on iron ore players, believing that supply-demand fundamentals will be supportive of pricing for years to come.

According to Investec, African iron ore players offer good value, but they acknowledge the daunting financing risks that they face. AMI and AFF are the companies they prefer with ZIOC potentially offering a good short term upside.

Forward iron ore price assumptions continue to assume average iron ore benchmark prices (WA, 62% fines, FOB) as follows: US$136/t in 2012, US$124/t in 2013, US$119/t in 2014, US$110/t in 2015, $82/t in 2015 and $75/t long term.

While there are numerous, well documented reasons to be cautious on global growth, and therefore on world steel consumption, on-going demand for iron ore remains robust, with pricing seemingly supported around the marginal cost of production, which is currently approximately US$130/t.

In their estimate of global iron ore supply and demand, no surplus supply is seen until beyond 2014 and then only if meaningful production is delivered beyond that already assured by the three major producers, Rio Tinto, BHP Billiton and Vale. This implies that in order for surplus supply to occur, volumes will need to be produced from projects that are currently not fully funded. This lends upside risk to the forward pricing assumptions, or at least support for an extended period of higher prices.

While higher pricing also lends support for the development of new projects, those companies that are not in production and/or have significant capital hurdles ahead face a daunting task in securing the financing required to deliver their growth aspirations. While there is a strong rationale for China to encourage as much future supply as possible, through sponsoring the development of emerging projects, solid strategic partnerships are becoming even more essential as China’s enthusiasm for funding greenfield projects appears to be waning.

Analysts: Hunter Hillcoat +44 (0)20 597 5182

?LKAB has settled contracts for 2012-13, with prices down 15-20% on last year, said Markus Petäjäniemi, senior vice president LKAB in early July.