Northland stock soars on rumoured hike in iron prices

The stars are lining up nicely for Northland's iron ore debut in Northern Sweden, which may explain why its stock price (NAU.TSX) has taken a stroll since I wrote about them two weeks ago. The shares hit $2.42 Cdn per share on Friday, roughly 25% higher on the week.

The spike loosely corresponds to news that Vancouver based Northland, with a suite of advanced properties in Scandinavia, has appointed a team of banks to arrange the financing for its Kaunisvaara Iron Concentrate Project in northern Sweden.

It could also mean that investors expect 2010 to be a record year for iron ore producers, and I believe that has to do with the prospect of a new pricing regime for the world's least fascinating metal.

Iron is priced with yearly benchmarks set by the major producers, based on supply and demand and sales contracts. However, since demand has been rocked over recent years from swelling Chinese consumption and the financial crises, some have argued for a spot based pricing system.This would create more volatility, as well as opportunities for greater profits during periods of high demand.

In any case, analysts widely agree that we'll have higher iron ore prices this year, and some are calling for a hike in the benchmark set by Western Australia producers of 70 per cent. That's in stark contrast to the industry's near-collapse just over 12 months ago, when Rio Tinto and BHP Billiton maintained year-on-year price cuts for deliveries to non-Chinese steel mills at about 30 per cent. Even bullish analysts expected a break-even, or 10% increase at best, this year.

But strong Chinese demand from the recent turn-around has sent the spot price soaring; The key spot price for deliveries to the Chinese port of Tianjin has been reported at more than $US133/t, after trading at less than $US60/t a year ago.

According to the Steel Business Briefing, a world steel information service, Vale is seeking to increase iron ore prices for its domestic buyers by 40 per cent in March and another 40 percent in April.

Of course higher value sales contracts, or even the prospect of them, can be expected to skew the metrics of Northland's feasibility study to the upside, making a more compelling argument for bank financing. We may also see a premium added to the projected 21.1 percent internal rate of return contained in the company's already completed preliminary study.

Looking good.

Kb