Chanos has long been bearish about the price of iron ore due to the weakening demand from China. Chanos joins David Einhorn, who expects that iron ore prices will fall to $80 per tonne in the near future.
Why is Chanos bearish on African Minerals? Is it a high cost producer? Political issues in Sierra Leone? Executive departures?
First of all, AMI is a relatively low-cost producer. The company expects to produce iron ore at $30 per tonne and be able to deliver it to China for $50 per tonne.
In fourth quarter 2011 the company started producing from the first phase of their development. The first phase had a capex of $1.9 billion.
Perhaps the reason for Chanos' bearishness is the fact that Shandong Iron & Steel (SISG) completed a $1.5 billion investment in 25% of all of the shares of the Tonkolili project companies. Under the terms of the agreement, SISG will also purchase iron ore under an off-take arrangement, with an additional equity ore option and dividend ore option, providing the company and the project with a significant level of guaranteed off-take for the Life of Mine. SISG has agreed to purchase a percentage of all production at discounted prices. Now the question is whether SISG would be able to honor the contract if steel demand stagnates in China.
It appears as though Chanos has identified a pure-play bet against China's construction boom. An indebted company with one major buyer from China could spell trouble for AMI and their shareholders.