Morgan Stanley has a new share price forecasting tool for mining companies. We set it to 'armageddon'

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Joe Hockey’s comments yesterday that for iron ore prices appeared to have “no floor” must have been chilling for the shareholders of Australian iron ore miners.

He said the government was “contemplating as low as $US35 a tonne.”

Prices like that are likely to see a number of global iron ore players go the way of Atlas Iron if these sort of prices were sustained.

Morgan Stanley has a new tool for clients called its “Interactive Commodity Sensitivity Model” which allows users to change the inputs for the operations of mining companies and see the effects those changes would have on the target share price.

So naturally we wondered what impact a fall to the Joe Hockey level would have on the valuation of Australia’s big three iron ore producers: BHP, Rio Tinto and Fortescue Metals (FMG).

Using current Morgan Stanley valuations for iron ore and the Aussie dollar – their base case – the future looks bright for these three miners. Given their current share prices of $1.78 for FMG, $54.99 for RIO, and $28.99 for BHP.

Morgan Stanley – implied forward valuations(base case)

But when you move the iron ore price down to $40 a tonne – the model doesn’t allow $35 – the picture looks very different. FMG looks under intense pressure with a negative valuation. But the big miners also come under extreme pressure at these levels.

Morgan Stanley – implied forward valuations (iron ore $40, AUDUSD 77 cents)

A falling Aussie dollar would be likely to cushion some of the impact of such a crash in the price of iron ore. But even with the AUDUSD falling to 65 cents the model suggests a forward valuation for FMG is still negative while RIO and BHP’s valuations are 35% and 28% lower respectively.

It’s important to stress this is a model, it’s not a certainty.

But the fact that the management of these firms is likely to understand how much pressure further falls will place on the entirety of their operations and companies as a whole suggests Joe Hockey is probably wrong.

There is an end in sight for the fall in iron ore. Company valuations say there has to be.

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