Iron Mountain, BHP, Fortescue Rise; Iron Ore Price to Soar 50% in 2008

And in the tenth month of 2007, the bull market brings forth Iron Mountain Mining, Ltd. (ASX:IRM) and sends its shares up 300% in one day.

IRM was just one of many shares storming to new highs yesterday, as the ASX/200 made an all time intra-day high of 6,684. Iron Mountain announced high grade mineralisation at its Mt. Richardson iron project in West Australia. In its price-sensitive release to the ASX, the company said that “The Iron Mountain Prospect rock chip samples averaged 61.3% Iron (Fe) over two kilometers of strike.”

The company announced results from two-other drilling simples. Both indicated high-grade haematite iron mineralisation. Which is another way of saying….eureka! Except in this case, rather than finding real gold, Iron Mountain has found industrial gold…the raw material desired by Chinese steel mills.

And at the upper end of the share-market, Fortescue (ASX:FMG) and BHP (ASX:BHP) both continue their relentless climbs higher. Fortescue is now the 23rd largest company in Australia by market cap, despite the fact it has yet to deliver any product to customers or make a profit. The catalyst for yesterday’s 8% lurch higher was legal. BHP lost its appeal against a ruling that allows Fortescue access to BHP’s Mt. Newman railway line in the Pilbara.

It doesn’t hurt Fortescue that iron ore prices are probably going to go up by 50% in 2008. Last week BHP floated the idea of selling more ore at spot prices, if it’s unsatisfied with the contract negotiations underway with Chinese steel mills. In the spot market, iron ore prices are already 40% higher than last year’s contract price.

This is an interesting moment in the commodity bull market. You have a structural repricing of iron ore that suggests a new base for prices. It reminds us of the repricing of oil in 2003 from a base of US$30 before the Iraq war to a new base of US$60 and, perhaps, given recent events in the long, sad career of the US dollar, US$80. Is US$100 the new US$40 for iron ore prices?

Here is where the difference between “cyclical” and “structural” becomes really really important. Commodity prices are cyclical. Demand for raw materials is a key part of any boom. But that demand wanes when credit becomes more expensive. All of that suggests the commodities boom is correlated with the credit cycle. But how, and more importantly, when? That is, how long before a bear market in credit means the end of the commodity cycle?

Dan Denning
The Daily Reckoning Australia

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