Overnight the iron ore price fell another $1.18 a tonne to $86.70 and investors are betting it could go lower with some substantial shorts registered against the iron ore miners.
According to the ASIC register nearly 16%, or $84.3 million worth, of Atlas Iron shares is currently being shorted. Atlas was trading down 0.85% at $0.58 a share a short time ago.
Meanwhile 7% of the 3.1 billion issued Fortescue Metals Group shares are being shorted, totalling about $901 million. This afternoon Fortescue was trading 1.95% lower at $4.02 a share.
Apart from Fortescue Metals Group, Atlas Iron is one of the purest iron ore plays on the ASX if you’re looking to bet on the price of the commodity.
“It’s highish but it’s not what you call massive,” IG Markets strategist Evan Lucas said of the short. “Atlas Iron is one of the pure bets to play the iron ore price.”
“Shorting Atlas Iron or shorting Fortescue is a way of getting exposure to a falling iron ore price,” he said.
Meanwhile less than 1% of both diversified miners, Rio Tinto and BHP Billiton, is currently held in a shorting position, demonstrating the cushioning power of operating across a number of commodities.
Lucas estimates about 98% of Fortescue’s earnings come from China and “Atlas Iron is not far behind it.”
Lucas said of the mid-cap iron ore miners, which includes BC Iron, Fortescue and Mount Gibson, Atlas Iron is at the higher end of the cost curve. Atlas also has a lot of exploration to do and it still has a big amount of capex to come.
“Atlas Iron is probably the poorest out of the four of them and that’s why it gets shorted the hardest,” Lucas said. “It looks like it could be making new lows.”
Atlas Iron’s production ratios are estimated to be about 58% iron ore per tonne, making it a price taker, which has to be “hurting margins”, Lucas explained.
“Their iron ore production ratios tend to be one of the lower of the mid-caps as well,” he said.
As for where the iron ore price is going to go the bears are raging, with many saying excess supply on the market could drive the commodity price below $80 a tonne, a level which would mean negative margins for some of the mid-caps.
“There’s a lot of bearishness around the iron ore price and whether the iron ore price will return,” Lucas said.
Meanwhile, the bulls are still confident the iron ore price could move back towards the $100 a tonne mark by Christmas.