Matthew Stevens From: The Australian November 19, 2010
BACK in 2005, David Flanagan climbed into his only suit for his first meeting with the managers of BHP's Pilbara iron ore operations.
Flanagan was then one of four full-time employees at Atlas Iron and he was meeting BHP to chat through the suddenly very thorny issue of railways and how his very junior company might one day secure some kind of access to the Pilbara giant's pathways.
Yesterday, after five years seemingly stuck on a conversational rail-loop, Flanagan finally emerged with the blueprint for an agreement with BHP over rail haulage. He is within reach of getting his iron ore carried on the global Australian's barely utilised and Australian Competition Tribunal-declared Goldsworthy line.
Now, during its conversation with BHP, Atlas has rather grown up. It is producing iron ore at a rate of 2 million tonnes a year from its Pardoo project in the northern Pilbara and has meaningful plans to move to 12mtpa from a range of prospects in the eastern Pilbara by 2013. It has grown market cap from $9 million to $1.5 billion, has no debt and $120m in the bank and is expected to deliver a debut profit of $180m this financial year.
Related Coverage BHP opens door on shared rail Daily Telegraph, 1 hour ago BHP on warpath over rail sharing The Australian, 10 hours ago Attack-dog tactics as juniors seek access The Australian, 10 hours ago FerrAus' Pilbara mine viable Perth Now, 15 hours ago BHP threatens junior with legal action The Australian, 20 hours ago
Getting Pardoo product on the Goldsworthy line would be a huge result for Flanagan and his shareholders, not least because it might potentially redraft the economics of his multi-billion-dollar proposed Pardoo-Ridley magnetite project.
But the more tectonic question here is whether Flanagan's MOU, given it is translated into a formal agreement, represents the first substantive crack in BHP's wall of resistance over third-party use of its crucial iron ore arteries or the very limits of the concessions it is prepared to make to governments and competition regulators.
All the evidence yesterday suggests the second proposition will hold true, that BHP's step towards opening Goldsworthy to haulage is more wallpaper than blueprint.
Within hours of getting positively cuddly with Atlas, BHP was legally chesting up to mining minnow FerrAus. Until September 23, FerrAus was in the same sort of negotiation with BHP that Flanagan has near-successfully concluded. But FerrAus wants haulage on BHP's Mt Newman railway line and earlier this week it told BHP it wanted approval to appoint Allan Fels as an independent expert to settle the dispute with the global one over the terms and conditions of access to that track.
BHP has given FerrAus until 5pm today to agree to withdraw that application or it will injunct to prevent Fels's appointment. It reckons that FerrAus has not ticked the boxes that trigger a move to what would effectively be arbitration of the haulage regime. It says discussions with FerrAus never reached the stage of negotiation because the junior never provided a proposal detailed enough for it to effectively model.
FerrAus reckons that is nonsense and it rather looks like we are all headed to the courts, yet again, to seek an answer to the enforceability of the haulage regime that is required under the West Australian state agreements of 1964 and 1987.
The holy grail for the Pilbara juniors is the pathway linking the distant eastern deposits with Port Hedland. And that link is nothing to do with Goldsworthy.
There are two railways on the eastern Pilbara pathway. BHP owns one (Mt Newman) and Fortescue Metals the other. Both sets of tracks pass directly through or past iron ore projects proposed by the three members of the North West Iron Ore Alliance. But BHP seems determined to protect its system from interlopers.
It argues that every tonne of Mt Newman capacity is required by BHP and believes there is nothing in either the competition law or the various WA state mining agreements that says it has to surrender utilised capacity to anyone.
To that end, BHP says a discussion about haulage will only be entertained if an applicant has a JORC compliant resource, has a bankable feasibility case, has a proven market and access to port capacity. Now, the NWIOA Three have their hands full of 50mtpa of port capacity at Utah Point in Port Hedland, that fourth box can be ticked by each of Atlas, Brockman Resources and FerrAus. Each too has a JORC resource that would justify a move from discussion with BHP to more formal negotiation. But those two middle boxes, well, they can only really be ticked when you can demonstrate the ability to get your ore to a port. And so far, only Atlas can demonstrate that either in the north or eastern Pilbara.
Atlas plans to build the Turner River hub that will be the collection and processing point for 10 million tonnes a year of iron ore to be extracted from at least three nearby deposits.
The thing about Turner is that it sits about 75km from Hedland and so Atlas's plans to truck its Turner blend down a planned private road really is a commercially viable option. According to Flanagan, trucking adds but a couple of dollars a tonne to his overall production costs. Plainly, getting ore on BHP's line, the even nearer Fortescue link or even the third track proposed by Hancock Prospecting would improve the economics. But it is not a pre-requisite.
Geography has not treated the other NWIOA partners, Brockman and FerrAus, so kindly. Brockman's Marillana project is bigger than any single operation Atlas has on the table and expected to support a 20mtpa operation from some time after 2013. But it is a good 250km from Hedland, which means the only viable option would seem to be rail. And FerrAus, well its pair of potential mines sit 75km east of the nether end of the Mt Newman link which means it is 452km from Hedland.
As we reported yesterday, Brockman is believed to be talking to BHP and is understood to have signed an uber-serious and restrictive confidentiality agreement that restricts either party discussing those negotiations.
Brockman could be equally well served, mind you, by tapping spare capacity on the Fortescue railway which was, famously, always touted as an open-access system.
The options in front of Brockman expose the importance of FerrAus's dogfight with BHP. The fact is that FerrAus has no obvious option other than the Mt Newman line. Because neither the Fortescue track nor Hancock's proposed Roy Hill link come anywhere near the FerrAus deposits. FerrAus must bust BHP's resistance or embrace the challenge of either trucking material to an available railhead or somehow generating interest enough to support a fourth eastern Pilbara rail path.
AGO Price at posting:
$2.92 Sentiment: LT Buy Disclosure: Held
