all aboard...

From the AGO thread...

All aboard Fortescue’s China line
By Tim Treadgold
August 21, 2009


PORTFOLIO POINT: Expanded port and rail facilities in the Pilbara will provide export access for small miners.


Fortescue Metals Group is not the only winner from its remarkable deal with China, which provides priority treatment and expansion funding in exchange for a bigger-than-average iron ore price cut. Small explorers with marooned deposits of iron ore will also win from the deal announced earlier this week.

Last week it was the Gorgon liquefied natural gas (LNG) project and opportunities for investors in the wider LNG industry that received the attention of Eureka Report (see Why Gorgon will fire the economy). The latest game-changing event in the resources sector is in iron ore.

Brockman Resources, Iron Ore Holdings, Atlas Iron, and BC Iron are four small players in WA’s Pilbara iron ore province poised to jump aboard the expanded railway and port facilities Fortescue plans to build with Chinese cash.


Brockman has just cleared an environmental hurdle for its $1 billion Marillana project, designed to export 17 million tonnes of iron ore a year from 2012.
Iron Ore Holdings is in the middle of a scoping study on its Iron Valley project and has just reported a doubling in the resource base to 160 million tonnes at the deposit, which lies close to two railways, one owned by BHP Billiton and the other by Rio Tinto.
Atlas is the first of the Pilbara minnows to start exporting after successfully developing the small Pardoo mine near Port Hedland. It is now developing a second mine at Wodgina, and has a third in the planning stages at Abydos, with more to follow.
BC Iron is proposing to start production early next year at a modest 1.5 million tonnes a year, growing to 3 million, thanks to a rail and port access deal with Fortescue.

What’s changed for these four, and others, is China’s offer to Fortescue of $US6 billion in debt, on terms satisfactory to Fortescue, so it can develop more mines, railways and port facilities, while China also stands in the market, keen to buy whatever can be produced in the Pilbara.

On display in the Fortescue deal is China’s anger at its failure to snatch control of Rio Tinto, and the willingness of its government to now do whatever is required to break the stranglehold on the global seaborne iron ore trade held by BHP Billiton, Rio Tinto, and the Brazilian-based Vale.

So far, interest has been in how Fortescue broke ranks with the big three to grant China a bonus discount on iron ore prices.

Rather than settle for a 33% reduction on 2008 prices, which is what BHP Billiton, Rio Tinto and Vale negotiated with steel mills in Japan and Korea, Fortescue agreed to a 35% cut in exchange for the $US6 billion debt package and a promise of priority treatment by China at future price talks.

In effect, Fortescue has become China’s Trojan Horse inside Australia’s iron ore industry, thanks to its need for more money to pay for expansion plans and the fact that a Chinese steel company, Hunan Valin Iron & Steel, this year became Fortescue’s second biggest shareholder, with 17.4%.

For BHP Billiton and Rio Tinto, this situation was probably predictable given their past refusal to assist Fortescue with rail and port facilities despite a clear understanding in the original agreements with the WA government that this is what they would do: create a third-party access regime for transporting iron ore.

More railways and ports have always been the key to unlocking the wealth in the Pilbara and turning small companies with marooned reserves into winners.

Fortescue has been a catalyst for change and will continue to play the role of a game changer, but there are other developments occurring, including expansion of government-controlled port facilities and a new port being designed by Aquila Resources (with Fortescue input) at Anketell Point.

Whatever the history, and however loud the howls of protest from BHP Billiton and Rio Tinto over an Australian iron ore exporter breaking ranks on price, the effects of the deal (with Aquila to come) are what investors should be considering.

In one deal, China has given the strongest possible indication that since losing the fight for Rio Tinto it is prepared to fund alternatives sources of iron ore supply, critical for its fast-growing steel industry.

At some point shareholders in BHP Billiton and Rio Tinto will ask their management teams why they did not deal with Fortescue early and draw it under their control rather than antagonise a rival, which has now become a very damaging cuckoo in their most profitable nest.



History will sort all of that out. In the meantime, there is money to be made by re-visiting the small end of the WA iron ore industry which has been neglected since last year’s share market shakeout.

What you will discover is that after the excess of the boom years leading up to mid-2008, all of the small explorer/miners have returned to more realistic valuations.

Atlas is a case study. After peaking at a fraction over $4 a share in May last year, it plunged to 40.5¢ late last year amid reports of an internal management struggle and a failure to sign a contract for its first proposed Pardoo shipments.

Today, Atlas is an exporter with its share price back up to $1.78, capitalising the stock at $695 million. As the details of the Fortescue/China deal trickle out over the next few months, much more can be expected because Atlas has a series of projects ready to develop and could grow quickly from a one mine operator to a company with three mines, exporting more than 10 million tonnes of iron ore a year.

Brockman, which peaked at $3 a share in May, 2008, and then plunged to 40¢, is back up to $1.26 (valuing the company at $171 million). It will take longer to join the ranks to exporters but the high-grade material in its Marillana project is precisely what China wants. It is also perfectly located to be loaded on a BHP Billiton railway that crosses the Marillana tenement but could build a spur line to a Fortescue/China railway.

Iron Ore Holdings fell from 92¢ to 9.6¢ between May 2008 and the end of last year as investors fled from the small end of the mining sector. Today, it is back up to 73¢ (valuing the stock at $85 million) as investors rediscover companies with high-grade reserves and the renewed possibility of getting material to market.

BC Iron plunged from $1.48 to 17¢ in the final six months of last year but is now back to 95¢ (valuing the company at $77 million), and although it has the least ambitious mine development plans of the small iron ore players, it has a rail and port agreement with Fortescue in place and would cause the least disruption to Fortescue as it slips into production.