kiernan article worth a big full read

Read the FULL article as juicy bit down towards the end; then read my comments:

BHP and Rio: China sees red
By Tim Treadgold



PORTFOLIO POINT: China will ban steel exports says a top miner - a move that would lift iron ore share prices.


China will ban steel exports if faced with a surge in iron ore import prices, says Michael Kiernan, one of Australia's leading mining entrepreneurs. As BHP Billiton moves to extend is power in the iron ore market through a takeover of Rio Tinto, Kiernan says China's restriction on steel exports will be part of a wider response to consolidation in the iron ore sector which may also include a “buyer's strike�.

As China shows its determination to influence the BHP plan for Rio (earlier today it was confirmed the China Development Bank denied UK reports that it had acquired a $500 million, 1%, stake in Rio). Kiernan says all iron ore investors could benefit from heightened interest in the sector. (Rio’s share price was up another 12% at one stage today, to $146.80.)

Kiernan built his career on selling manganese, chromite, nickel and iron ore to Chinese steel mills. More recently he emerged as he man in the middle of one the market's hottest resource takeovers, the battle for Consolidated Minerals. Now Kiernan says: “The Chinese can see that everyone in the resources world is making super profits, and they’re footing the bill."

According to Kiernan, the Chinese will clamp down on domestic steel exports in an effort to secure supply. However, the impact of this move on Australian iron ore stocks will be positive as the iron ore commodity price moves upwards.

Kiernan also reckons a “buyer’s strike� is possible, firstly to act as a circuit-breaker in the latest round of iron ore pricing talks, which are tipped to deliver a rise of 50% or more; but also as a reaction to the possible merger of the two big miners, which would further concentrate the supply pipeline.

Kiernan rescued, and then re-built the troubled manganese miner Consolidated Minerals, now the subject of a takeover tussle between Russia's Palmary and Brian Gilbertson's Pallinghurst (Kiernan, working though Territory Resources, was an early bidder but has now dropped out). Last month Territory Resources shipped its first cargo of iron ore from the Frances Creek mine in the North Territory.

While selling manganese, Kiernan saw first-hand how the central government of China can dictate market events when angered. Two years ago, when he was representing ConsMin (and Marius Kloppers was representing BHP Billiton’s manganese operations before his appointment to the chief executive’s job in that company), the Chinese stopped buying, with a devastating effect on the manganese market.

“When the price hit $US4 (a pound) they simply refused to buy,� Kiernan said. “They stockpiled at the wharf, and switched to low-grade material, and the price fell overnight.�

The people who buy manganese, which is an essential ingredient in most types of steel, are the same people who buy iron ore.


The interview

Tim Treadgold: You talk of China reacting to demands for higher iron ore prices, but what can a buyer really do?

Michael Kiernan: Go on strike. I’ve seen it in manganese. I’m not saying they’ll go on strike with iron ore, but the Chinese Government is being pushed into doing something to rein in the iron ore market, which, from their perspective, is out of control.

If not a buyer’s strike, then what?

They’ve got a number of options. The first thing they’ll do is ban steel exports as they did in alloy and aluminium. They took that step because China subsidises electricity production, so I think you might see something similar such as a ban, or the application of significant taxes on the export of steel. That’s not all bad because it should send the world steel price substantially higher.

Are the Chinese being seriously hurt by rising commodity prices?

Yes. There is real concern among steel producers that with oil prices driving up all energy costs their (profit) margins are being squeezed. They’re terrified that if the iron ore price goes higher, and the Brazilians are reported to be starting negotiations at a 70% increase, then they (the steel mills) will lose what margin they have left.

Have you any first-hand experience of the Chinese Government’s position?

I went to a China Iron and Steel Association conference in China last week and for the first time there was a government official who attended, and lectured all iron ore producers that they have no right to increase prices. He went on about China suffering significant pain, and talked about hands across the sea, helping each other and things like that, and he made it quite clear that a price rise would be very unwelcome.

What do you think that will do to Australian iron ore producers? Will they just ride it out?

I doubt there’ll be too much of a jolt. Price multiples (for iron ore miners) are lower now than they were 10 years ago because the earnings are so high. What will it do? Well, speaking with (the Hong Kong commodities supplier) Noble Group I’d have to say that we’re all confused about what might happen next.

Would the Chinese single out a particular company and punish it?

I think that may well be what they might do, but we’ll have to see. The market is in turmoil. The Brazilians are just loose canons. Rio Tinto is a disciplined marketer. BHP is in a different position. Two years ago, when BHP stuck out and said it wanted to claw back the freight differential [part of the pricing mechanism that advantages Brazilian iron ore exporters] the word went out from the [Chinese] Government that BHP was the supplier of last resort. That’s when we saw BHP hold a board meeting in China for the first time with all the directors trying to rebuild bridges.

Can you pinpoint exactly what the Chinese might do if the iron ore price does rise sharply?

No. We’ll just have to wait and see, but there’s no doubt China is annoyed and it could take a number of steps, ranging from a buyers strike, to a ban on steel exports, to singling out one company for punishment, such as cutting its market share.

Can you understand BHP Billiton’s game plan in pushing the Chinese for a substantial price rise, and an end to the freight rate differential’, which would be of substantial benefit to Australian exporters?

Marius Kloppers is not a fool. I have never met anyone with such a great intellectual approach to marketing raw materials, and he’s a marketing guy, he’s not operations although he understands them. So whatever plan he’s come out with it’s well thought out, but I’m not quite sure where they’re going.

But the Chinese are not happy.

No, they’re not. They read the Wall Street Journal like we do. The Chinese can see that everyone in the resources world is making super profits and they’re footing the bill.

Moving on from iron ore to the hottest takeover on the market, the battle for your old company, Consolidated Minerals: are you still a bidder?

No, we’re now watching from the sidelines, but it is bit of mess, isn’t it?

Is that one way of saying that the price [$4.86 on the market today versus rival takeover bids at $4.50] is too high for you?

Whenever I’ve looked at any project it must return 20% on investment and it must be earnings [per share] positive. At $3.50 ConsMin was bang on that. I could have stretched out to $3.75.

So how is it possible for anyone to make money should they get control at $4.50?

In the case of Pallinghurst [the bidder led by former BHP Billiton chief executive Brian Gilbertson] it won’t work. But in the case of Palmary [led by Ukrainian steel mill owner Gennadiy Bogulyubov] he can afford it because he is a major user of manganese [the primary product of ConsMin].

Can you explain how that works?

He can make a major saving by buying a source of supply for his steel production. It’s a straight raw material play, and manganese represents 30% of his production cost, so he could, in theory, halve his manganese cost, and lift his profit by 15%. Right now, he’s making $US100 million a month in profit so this deal is major profit boost.

That appears to indicate that Palmary can bid even higher than its $4.50.

He’s going to come back at $5. He will pay $5. (Consolidated was trading at $4.66 early today, November 12.)

Is it Palmary’s buying power that pushed you out?

As soon as I saw Palmary come in with its end-user buying power I knew it was all over. Gilbertson is like me: he wants to make a profit out of ConsMin’s Woodie Woodie [manganese] mine. Bogulyubov doesn’t. He doesn’t care.

Turning to what you’re doing now. Is Territory a recreation of Consolidated Minerals?

Yes, there’s no doubt about that. When they threw me out on the street over at ConsMin [Kiernan’s new office at Territory is 50 metres up the street from ConsMin in West Perth] Richard Elman from Noble Group said he just wanted to replicate ConsMin, but instead of doing it with manganese, we’d do it with iron ore.

Your first (iron ore) mine at Frances Creek is very small.

You could even say it’s preciously small, but you have to see that as a start. I couldn’t say what we’re doing is identical to ConsMin because the exploration potential is probably less. At ConsMin we could see tremendous potential, but at Frances Creek, we probably have enough iron ore to keep us going for 10 years at about five million tonnes a year.

Which would appear to indicate that you’ll be looking to add new mines.

We’re getting close to Matilda (an emerging zircon and ilmenite miner).

But that’s in a different business to supplying the steel industry which is what ConsMin is all about.

True, but it is about supplying China. What I’d like to do is build Territory up to 25 million tonnes a year over five years through about three different iron ore projects. The maximum from Frances Creek is about five million, and we’re looking at a couple of other projects – one in South Australia and one in WA.

After iron ore, surely nickel is a natural?

No. What I don’t want to do is get involved in underground mining. What I found at ConsMin is that open-pit and underground mining have a completely different culture and require different skills. I want to focus on open-pit. We might be back in manganese if we run the Woodie Woodie mine for Bogulyubov, but we’ll have to wait and see what happens, and we’re getting close to Windimurra vanadium [formerly Precious Metals Australia].

Is there a size target for Territory?

I’d like to have the iron ore within three years running at a minimum of 10 million tonnes. I’d like mineral sands, also within three years, to be running at a couple of hundred thousand tonnes of concentrate. Vanadium – I’d like to think within 12 months we’d have that under our belt, and producing between 5000 and 6000 tonnes of vanadium a year. So, I’m 58, I’d like to work until I’m 63, and my target is to grow the capitalisation of the group to $2.5 billion within five years.





TTY possible takeover of MATILDA MINERALS LTD?????



"We�re getting close to MATILDA (an emerging zircon and ilmenite miner).

Is there a size target for Territory?
I�d like to have the iron ore within three years running at a minimum of 10 million tonnes. I�d like MINERAL SANDS, also within three years, to be running at a couple of hundred thousand tonnes of concentrate."