AdvertisementAdvertisementJamie Freed January 21, 2008 Page 1 of 3 | Single page PERHAPS BHP Billiton can take comfort it was not alone in its ability to underestimate the chief executive of Fortescue Metals, Andrew Forrest.
After all, five years ago his grand plans to turn a penny-dreadful stock into the Pilbara's "new force in iron ore" seemed like little more than a pipe dream. Australian institutional investors were quick to shun the former head of Anaconda Nickel.
As Fortescue Metals's $3 billion-plus project has progressed, its high-profile push to run its own trains down the Big Australian's massive private railway line has attracted plenty of attention. But as a helicopter flight over Port Hedland makes clear, at this point, the railway case is more of an expensive legal distraction than a real threat to BHP's operations in the near term. The urgent threat - and one that could be satisfied through a successful bid for Rio - is to BHP's port planning.
It is understood BHP is unlikely to launch a bid today despite Friday's rampant market speculation of an imminent move. The chief executive of BHP, Marius Kloppers, has several appointments scheduled in Melbourne today, and a key banking adviser is in the US. But that does not mean BHP will necessarily walk away before the February 6 deadline.
Although they have been loath to show it in public, BHP's iron ore management team must have been privately sweating over Fortescue's ability to lock up scarce land at Port Hedland. Fortescue has grabbed an incredibly valuable 100 million tonnes-a-year capacity at Anderson Point in the port's inner harbour, capacity BHP might have been counting on for its next expansion.
The BHP iron ore president, Ian Ashby, was noticeably reluctant to comment on the issue at a media briefing in Perth on Saturday.
"Allocations are made by the port authority," he said. "We hadn't applied for that land."
Asked whether BHP regretted that decision, his response was curt: "We take what we have."
BHP's takeover target, Rio Tinto, says its rival's capacity constraints at Port Hedland are a key component of its decision to make a takeover bid.
"For [BHP] to get beyond their current tonnage they are going to have to come out to an outer harbour with a very long jetty with a multi-user jetty coming off that side," said Rio's iron ore chief executive, Sam Walsh.
The message about BHP's iron ore export challenges is becoming an element of Rio's takeover defence. Rio was so keen to demonstrate BHP's capacity constraints it took journalists on a secretive helicopter ride over Port Hedland.
Ashby said the latest design called for about 27 kilometres of dredging to create an appropriate shipping channel in the outer harbour. The outer harbour would give BHP an initial annual shipping capacity of 100 million tonnes and an ultimate capacity of 400 million tonnes after staged expansions. Ashby said the outer harbour jetty length had yet to be determined. Rio says it would be 10 kilometres long, but it had also said the outer harbour would require 40 kilometres of dredging rather than the 27 kilometres mooted by BHP.
BHP has about 200 million tonnes of potential capacity available in the inner harbour, with another 100 million tonnes allocated to Fortescue.
For its part, Rio has two available ports, Dampier and Cape Lambert, which are not competing with other users and are not capacity constrained. That means Rio also has more available land around its port operations for crushing and screening, blending and stockpiling iron ore.
Rio executives reckon the takeover equation is simple: BHP wants to use the spare capacity at Cape Lambert rather than build the expensive outer harbour at Port Hedland. BHP said it was negotiating with the West Australian Government to receive compensation from later outer-harbour users, if it has paid for the dredging. But when the Herald asked Rio's Ashby whether BHP would build the outer harbour if its proposed takeover for Rio succeeded, he said: "I can't answer that question."
Internally, BHP must have an answer. And although it is merely speculation, Rio's team can make some educated guesses about what a combined BHP-Rio iron ore business would look like. For example, ore from Rio's Yandicoogina mine, right next to BHP's Yandi mine, would probably be railed to Port Hedland rather than to Rio's current ports, given the shorter distance.
Rio and BHP - and Fortescue, for that matter - all use the same-gauge train tracks, meaning they could run their locomotives and wagons down each other's lines. But there is a problem that comes into play at the ports. As the ore cars are of different sizes, the wagon dumpers are not compatible. So, under the current set-up, Rio could not unload iron ore from BHP's wagons and vice-versa. Assuming BHP chose to use Dampier and Cape Lambert for expansion rather than the outer harbour, it might have to switch its ore cars to Rio's size.
The size of the ore cars is not the only difference between the BHP and Rio iron ore operations. As BHP likes to brag, it owns more of the equity in its iron ore business, as Rio has several joint venture mines in which it owns about 50 per cent. BHP relies on contractors for 70 per cent of its mining - including all of its fly-in/fly-out operations - while Rio does all of its own mining with both residential and fly-in/fly-out positions available.
"Our mining contracts have served us extremely well," Ashby said. "They are big organisations, and they have great capacity, so when we ask them to increase capacity they can draw on a very strong base and get it done quickly."
The companies have also chosen different processing and blending routes. Rio does much of its blending at its port facilities and trumpets the successful introduction of its "Pilbara blend" product last year as a major innovation. The blend in effect allows Rio to sell a consistent, but lower-grade product, and achieve the benchmark price.
BHP plans to follow suit by reducing the number of products it sells to five from seven after forming two big processing hubs near its mines. Rio argues it tends to be more efficient to blend at the port rather than sending railway shuttle cars to a mine hub processing facility.
But BHP says blending at its mining hubs allows it to keep fewer stockpiles at the port and to better schedule its shipments. Port issues are a more important consideration for BHP, since there is not as much available land at Port Hedland and the nearby town complains about the amount of dust generated by BHP.
Despite the operational differences, the profitability of the businesses is remarkably similar on a per-tonne basis. BHP last week said it had a higher margin per tonne before interest and taxes, while Rio claimed a higher margin before interest, taxes, depreciation and amortisation.
Rio last week touted its automation program, which will allow it to control its mine and railway from a remote operations centre in Perth.
Ashby refused to be drawn on whether BHP would follow with an automation program of its own.
"I'm not prepared to comment in a public forum on what Rio may or may not do," he said. "We've got a great business. We're performing very well … we've got great prospects and a great resource base which we own a lot of."
The reporter travelled to the Pilbara courtesy of Rio Tinto and to a briefing in Perth courtesy of BHP Billiton. Email Print Normal font Large font Page 1 2 3Next pageView full articleWhen it happens: send
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