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The Pilbara remains the land of the giants
Mathew Murphy
October 9, 2010

THE Pilbara iron ore industry is Australia's biggest export earner. With the value of its exports running at more than $50 billion, it dwarfs all other sectors.

BHP Billiton and Rio Tinto are the Pilbara's behemoths. Their combined annual production of more than 370 million tonnes accounts for 85 per cent of the industry.

It is a position of dominance they intend to maintain, with or without their now well-faded hopes to combine their Pilbara interests in a $US116 billion joint venture.
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Each company has individual plans that could increase the combined production to 600 million tonnes a year in five to 10 years. Near record iron ore prices are supporting the push, and the export boost is a key factor in Australia's relative prosperity.

While the rest of developed world searches for growth, the ability of Pilbara's riches to lead Australia's mining investment and production boom is one of the reasons the dollar is now nudging parity with the US dollar.

But the Pilbara is not the preserve of Rio and BHP. Several iron ore hopefuls are set to join the league of producers over the next year, and those already in production are increasing their output.

Andrew Forrest leads the second ruck. His Fortescue Metals Group calls itself the ''new force in iron ore''. Now a $17 billion company, Fortescue has come from a standing start a few years ago to producing 55 million tonnes a year - a level that 10 years ago would have done Rio and BHP proud.

Mr Forrest believes Fortescue has the ability to mix it with BHP and Rio and is undertaking feasibility studies on two more projects that would increase production to 155 million tonnes a year. By 2017 that could be 360 million tonnes, he told analysts recently.

Chinese-backed CITIC Pacific has been quietly working away at having its Cape Preston project in production at the end of the year. The planned production rate is 26 million tonnes a year.

David Flanagan, at Atlas Iron, is among the now limited number of Pilbara producers. All but Rio, BHP and Fortescue must overcome infrastructure constraints.

Despite having a market capitalisation of $1.35 billion, Mr Flanagan aligns himself more with the ''juniors''.

Atlas expects to produce 6 million tonnes this year, which would double to 12 million tonnes in 2012.

BC Iron expects to start producing 1 million tonnes a year from December at its 50-50 Nullagine joint venture with Fortescue, and Gindalbie Metals says its Karara project will produce 2 million tonnes a year from early next year.

Brockman Resources is further back but expects to be one of the top five haematite producers when it starts in 2013.

Brockman's feasibility study, completed last month, highlights the problem many iron ore hopefuls face - access to infrastructure. Costs for Brockman could range between $1.3 billion and $1.9 billion, depending on whether it may use BHP's Newman rail line to Port Hedland.

The Australian Competition Tribunal denied access to the line in June, along with Rio's Hammersley line, ruling that the costs of opening it to smaller miners ''were so great that access would be contrary to the public interest''.

However, the tribunal did allow access to BHP's Goldsworthy and Rio's Robe River lines, on which less ore is carted, so that was deemed less disruptive to BHP and Rio's operations.

Infrastructure is considered one of the major advantages that BHP and Rio have over the rest of the pack.

In fact, even if BHP and Rio do walk away from their doomed iron ore joint venture, their Plan B is expected to let them to achieve more than half the $US10 billion in synergies that would have come from the merger.

Plan B involves a heads of agreement signed in June by both companies and the West Australian government that would raise royalty rates for BHP and Rio to levels paid by other producers but permit the sharing of infrastructure and the blending of products.

The UBS analyst Glyn Lawcock says about $US5.6 billion in synergies could be achieved through the deal. That would include $800 million through rail optimisation in the east Pilbara, $US3.4 billion in savings through blending product and at least $US1.4 billion from the planned port expansion and better utilisation. Not a bad consolation prize.

The Rio director Mike Fitzpatrick raised Plan B at Rio's board meeting on Monday night, suggesting that perhaps it was time to focus on that alternative.

It is Plan B that is likely to encourage BHP and Rio to collectively pull the pin on the iron ore joint venture before long.

When the pin is pulled, Rio will need to tread carefully, according to the Pengana Capital fund manager Tim Schroeders. He said Rio's reputation could be further sullied, depending on how is handled itself afterwards.

''It was already labelled the dishonourable woman by China when it ditched Chinalco for BHP,'' he said.

''It will want to do the most honourable thing in this situation to show those who may want to do future deals with the company that it still operates with the highest integrity. Obviously if the source of the leak is identified as being within Rio, then it will cause further problems.''

It was Rio's failed Chinalco deal that had the potential to radically alter the corporate and political dynamics of the Pilbara. Announced by Rio during the depths of the global financial crisis in February last year, the ''strategic partnership'' Rio had planned with its biggest shareholder was to deliver a $US19.5 billion cash injection.

The cash was in return for a bag of assets, including a 15 per cent stake in Rio's main operating unit in the Pilbara, Hamersley Iron, for a knock-down price of $US5.15 billion.

But a shareholder backlash to the rescue deal with the state-owned Chinalco saw it pulled in June last year.

It was replaced by a $US15 billion rights issue to Rio shareholders and the now near-dead iron ore production joint venture with BHP, which came with a $US5.8 billion ''equalisation' payment to Rio.

Under the deal planned as a replacement for Chinalco's bailout, Rio would have returned to financial health, with the help of the rebound in commodity prices, and BHP would have got what it had craved for more than a decade - a greater share of the Pilbara iron ore riches. Or so it thought.

Like Rio, BHP has its own aggressive expansion plans, which feed in to official forecasts that Australia's iron ore exports will grow to 437 million tonnes next year. That is up from 309 million tonnes in 2008. At current prices the additional production is worth $18 billion to exports.

with Barry FitzGerald