Renaissance Capital, the leading emerging markets investment bank, remains positive on the near-term outlook for iron ore prices, believes that iron ore producers with growth projects in emerging geographies look increasingly more attractive than their Australian peers, considering their lower capital cost estimates and significant trade discounts. The average annual capex per tonne of iron ore capacity in Australia is currently around $175/t, Renaissance Capital analysts say; whereas capital costs in the emerging West Africa hub and Russia/Ukraine are estimated to be 15-30% lower at around $120-150/t. It is also noted that the current cost of adding new iron ore capacity in Western Australia has increased to as much as $190/t. Based on P/E and EV/EBITDA metrics, iron ore producers with growth projects in emerging geographies trade at significant discounts to Australian producer Fortescue, Renaissance Capital analysts say. While this is not surprising, it highlights the potential re-rating of companies that can deliver growth. For example, IRC and African Minerals have forecast EV/EBITDA and P/E multiples >50% below Fortescue in 2016, when production has largely ramped up. Companies across the Renaissance Capital iron ore coverage universe have experienced significant cash cost inflation, with costs up by as much as 55% in the past 12 months. EBITDA margins, however, remain at elevated levels, averaging ~50% in 1H11 for producers Fortescue and Ferrexpo, Renaissance Capital analysts say. For BHP Billiton’s and Rio Tinto’s current iron ore EBITDA margins of ~75% to fall back to their 10-year historical average of ~60%, iron ore prices would have to decrease to ~$110/t (62% Fe, CFR China, dry) assuming cash costs remain constant at ~$45/t. Renaissance Capital remains positive on the near-term outlook for iron ore prices, forecasting an average price of $155/t (62% Fe, China CFR, dry) through 2012 and 2013, before a decline to a long-term price of $97/t, real, in 2016. In the short term, iron ore prices remain supported by Chinese steel production of above 700mn tpa, and declining iron ore grades in China (Renaissance Capital analysts calculate there has been a 20% decline in grades over the past 4.5 years). However, China’s rising iron ore port inventory is a risk, with the current 53 days of inventory continuing to trend towards the July 2008 peak of 62 days. Renaissance Capital is initiating coverage of Fortescue Metals Group (FMG AU; HOLD; TP AUD6.30) and IRC Ltd. (1029 HK; BUY; TP HKD2.90). It has also provided company updates for Ferrexpo (FXPO LN; BUY; TP GBP4.74) and the emerging West Africa producers Bellzone (BZM LN; BUY; TP GBP1.00), African Minerals (AMI LN; BUY; TP GBP8.50), African Iron (AKI AU; BUY; TP AUD0.56) and Sundance (SDL AU; BUY; TP AUD0.76).