afr article today

Nothing new, but not sure why FMS does these interviews if it is close to a "rail solution"....


Flinders Mines executive chairman Robert Kennedy has resorted to keeping a crumpled up map of Western Australia’s north-west Pilbara region in his pocket. As he unravels the dusty map jotted with towns, roads and other places of interest, he immediately looks for the scale.

“We are around 40 kilometres from Solomon,” he says, pointing to the company’s tenement and indicating its distance from Fortescue Metals Group’s large iron ore Solomon operation nearby.

Kennedy is proud of the company’s ­Pilbara-based iron ore project.

Demand for commodities like iron ore has been high since the turn of the century. Iron ore is principally used to make steel and China’s aggressive growth strategy in the past 10 years has resulted in an unquenchable thirst for the commodity.

Flinders wants a piece of the iron ore pie but Kennedy’s fixation on the map, which fails to capture the vast distances of the striking red sand region, highlights the fact that his prized asset will be stranded if it is eventually mined.

A key challenge for any small resources company is getting the resource out of the ground. “We have the ore, we just need to get it to the beach,” Kennedy laments.

The “beach” is the jagged coast of WA’s north-west where some of the busiest ports in the world reside including Cape Lambert, Dampier and Port Hedland. Off the coast, huge cargo vessels full of cargo jot the horizon. The overwhelming majority are bound for China laden with iron ore.

Just three rail networks transport iron to the coast, all privately owned by Rio Tinto, BHP Billiton and Fortescue.

MUD SLINGING
Access to these networks is a hotly contested issue that has led to court battles, regulatory injunctions, heated negotiations and its fair share of mud slinging.

Rio Tinto and BHP are not required to give other iron ore providers access to their wholly owned rail lines. Fortescue’s Andrew “Twiggy” Forrest tried in vain to gain access to access to these lines in 2004 when the ambitious resources magnate’s company was at early stage of its development.

When he failed, Fortescue began constructing its rail line, which is part of a subsidiary known as The Pilbara Infrastructure (TPI). TPI has become a prized asset for the company and no doubt Forrest was relieved when the strong increase in its cash position, revealed on Tuesday, meant that it might not have to sell a stake in it.

Nonetheless, Fortescue’s railway was built with a caveat from the WA Government that still applies.

The infrastructure’s “philosophy”, as described by Fortescue, is to provide open access to its network for other miners. Fortescue says the infrastructure should increase the number of tonnes transported to Port Hedland and “remove a fundamental barrier to entry for junior mining companies”.

Already, the amount of iron ore that travels down these rail tracks is remarkable.

Activity at Port Hedland, where BHP, Fortescue and a number of other junior iron ore miners export iron ore from, continues to grow at a frantic pace.

In 2007, more than 100 million tonnes of iron ore was exported from the terminal. That figure hit 280 million tonnes in July this year in an annual record.

Harbourmaster John Finch has said expansion plans in coming years could boost the port’s capacity to close to 500 million tonnes of exports.

NO SUCCESS WITHOUT RAIL
Flinders Mines is roughly 200 kilometres from Port Hedland as the crow flies. If it can’t use its closest railways, which belong to Rio Tinto and Fortescue, it would be forced to transport its iron ore to the coast by truck.

Flinders is not alone in its struggle.

A number of other companies, often referred to as iron ore juniors because they are dwarfed by the huge iron ore operations of BHP Billition,

Rio Tinto and, increasingly, Fortescue, face the same issue.

Many have a proven iron ore deposit but don’t have an economically viable transport solution. The Pilbara’s vastness remains its biggest challenge and that has led to an increasingly desperate race between iron ore juniors Atlas Iron, Brockman Mining, Mineral Resources and Winmar Resources to find a solution.

The only iron ore miner to successfully negotiate a rail deal with Fortescue’s infrastructure subsidiary is junior miner, BC Iron.

Michael Young was the only employee of BC Iron when it floated on the Australian Securities Exchange in 2006.

Young, who has since stepped down as managing director, is adamant BC Iron’s asset was worth nothing if it could not secure a rail line to transport its tonnes in the future.

“When I first got involved with BC Iron, it was pretty apparent the only way it was going to succeed was by doing something with Fortescue because of our proximity to their railway line,” he says.

The relationship between BC Iron and Fortescue was positive from the outset. It granted Fortescue permission to freely explore its tenements when it was developing the rail line – something, Young found out later, that not every junior player offered.

Several years later in 2009, when BC Iron was ready to begin exporting, it announced it had signed a an infrastructure deal with Fortescue.

Weeks later, it announced it had signed a joint venture agreement where Fortescue could earn a 50 per cent interest in BC Iron’s Nullagine Iron Ore Project.

The chronology is important to Young, who along with other company executives were heckled by the mining community for “giving away” 50 per cent of its share of its sole project.

“I get tired of people saying we gave it away because until we had access to the infrastructure, we had no value,” he says.

“It came back to me that I was referred to as Andrew’s [Forrest’s] bitch. That’s the kind of animosity we put up with.”

BC Iron’s success hinged on the relationship it had built with Fortescue over many years but, according to Young, the negotiations were robust.

“Negotiating the infrastructure and joint venture was not easy. Andrew [Forrest], in one of our very first meetings, said, ‘Look Michael, we are not a charity’,” says Young.

BC Iron recently paid Fortescue $190 million to buy back 25 per cent of the asset in December last year, to now own 75 per cent of the project.

CHANCES OF EXPANSION
Now Atlas, Brockman and others are faced with the same high stakes problem. If there is no rail solution, it potentially kyboshes some of their chances of production and, in Atlas’s case, expansion.

Atlas currently trucks its ore to the port but it is far more costly than a rail solution.

RBC Capital Markets estimates road haulage from Atlas’s Mt Webber deposit, which is around 230 kilometres away from the port, would cost approximately 11¢ a kilometre tonne, which equates to $20 to $25 a tonne.

Fortescue’s rail costs are around $2.50 to $3.00 a tonne for its 300 kilometre rail haul, which represents 1¢ a kilometre tonne.

Junior iron ore players are understood to be in discussions with the richest person in Australia, Gina Rinehart, as she ramps up her ambitions for her majority-owned ­Hancock Prospecting to build a rail and port facility at Port Hedland for its Roy Hill project.

Brockman, in its ambitious bid to secure a rail solution, has taken a more aggressive route. The Chinese-controlled iron ore junior applied to the WA Economic Regulation Authority for access to Fortescue’s railway line in May to spark a favourable commercial outcome between it and Fortescue. A few months later, in a bid to keep its options open, Brockman signed a memorandum of understanding with Aurizon ­(formerly QR National) to construct and operate an independent rail line. Within the same week, Brockman announced a tie-up with Flinders Mines that could see the two companies combine on supply and infrastructure.

Atlas currently trucks its ore from its mines but in order to achieve its proposed production ambitions of 46 million tonnes a year, it needs a rail line.

One thing appears certain, Fortescue will drive a hard bargain for any rail deal and analysts believe it will be tough for another provider like Aurizon to develop their own rail and port facilities cost-effectively.

“Fortescue would have a good idea of what it costs Atlas to truck its ore, so they’ll presumably be looking to charge as close to that as possible for access to its rail line,” says RBC Capital Markets analyst Chris Drew.

Fortescue raised $3.7 billion to develop TPI in 2006. The Pilbara miner has upgraded it since so it’s worth far more, and Fortescue is still attempting to sell a minority interest in infrastructure. And although the jury is out on whether it will be successful, the stake could fetch $3 billion or more.

Building a rail line today would cost a lot more than Fortescue’s initial outlay.

Rinehart’s Hancock Prospecting remains confident of securing a $7 billion funding package for the Roy Hill iron ore project after meeting with banks and claims it is on track to meet an end-of-year deadline.

But for now, for Kennedy and other junior iron ore miners, the battle for rail is just beginning.