BC Iron Ltd (ASX.BCI)

I learned about this stock in the process of researching Alkane Exploration (ALK). ALK has a 16% stake in BCI, and whilst I like ALK, I dont see it as a buy for another year or two, since its attractive zirconia and gold projects still need some work.

The attraction of BCI is that they have a large iron ore exploration area just north of one of the front-runners in the iron ore game - Fortescue Metals (FMG). Already Fortescue have tied up marketing agreements with a Chinese buyer, and its likely that FMG will emerge as a large (iron ore) mining house. So why not buy FMG you say? Well thats not a bad idea, its just that the returns are likely to be better on BCI, but FMG might be considered a lower risk investment by many. I dont think so...but it seems to be convention that bigger stocks are safer.

BCI's project has had little work done on it, but preliminary investigations suggest there are areas of good iron ore content. The project areas are 70km from the Fortescue loadout facilities, but of course its likely that the rail line would be extended to the mine in cas of production.

In case you are wondering why FMG-BCI, you need to understand that iron ore consumers have a vested interest in negotiating supply agreements with smaller companies like FMG. For the last 20 years, Rio Tinto, BHP Billiton and CRVD (Brazil) have been consolidating control over iron ore production worldwide, and have lead in price negotiations. The Chinese, Indians and other consumers have a vested interest in breaking that 'cartel' by offering purchasing agreements and finance to alternative suppliers.

FMG has already negotiated access to the BHP rail infrastructure and are building a new loading port on the WA coast. By tying up with FMG, BCI will gain access to FMG's infrastructure. For a $60mil -odd company thats alot of leverage. Its possible that FMG will eventually takeover BCI. It seems likely.

Mind you - there are alot of iron ore projects....so expect future price weakness. But given the cost of establishing a new mine & supporting infrastructure, as well as the current shortage of mine services, it seems likely that over-supply is likely 5 years away. I see significant price weakness then because:

1. A plethora of new iron ore mines

2. A fall in iron ore (steel) demand because of rising interest rates globally.

Anyway, you should have fun in the next few years on commodity stocks. Looking at the technical analysis for this stock, its apparent that we ae looking at an ascending wedge with 2 plausible growth paths. The $2.10-2.20 levels are going to prove to be tough resistance levels, so I would advocate taking profits at these levels. The stock price is currently $1.45 - so that doesn't leave much upside. The reality is - I cant see any short term break out (above $2.20) because they still have alot of work to do. But given the tie-up with FMG I might be proven wrong on this. The reality is that it really depends on how much supply FMG can contract and whether FMG can service that ore from its own leases. It would be prudent for it to defer BCI developmenr until its ore deposits reach a mature phase of development. Given that risk, I see this stock as a speculative BUY, and FMG as the safer entry. But having said that....I prefer gold and silver.

- Andrew Sheldon www.sheldonthinks.com