Iron ore giants on spending spree

A bulk carrier is loaded with iron ore in Western Australia

• Paul Garvey

  Resources Reporter

  @PDGarvey

  
• 11:00PM November 30, 2018
• 1 Comment

Billions of dollars are getting thrown around, competition for labour is growing, and bitter rivalries are coming back to the fore. Welcome to yet another Pilbara iron ore construction boom.

Rio Tinto’s decision on Thursday to invest $3.6 billion developing its new 43 million tonne per annum Koodaideri iron ore mine means all three of the Pilbara’s big dogs — Rio, BHP and Fortescue — are pushing ahead with major new projects in the region for the first time in years.

Rio’s announcement came as Fortescue was detailing investment plans of its own while touring analysts, bankers, ratings agencies and journalists across its Pilbara iron ore operations.

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There are some key differences to the construction wave that rolled across the Pilbara during the last mining boom.

All three of the big new mines under development are aimed at maintaining production levels rather than expanding output — a reflection of both the state of the iron ore market, and the disciplined supply mentality within today’s boardrooms.

The new mines will also be distinct from their predecessors in their reliance on automation, which has become an increasingly important and proven part of the industry since the last construction frenzy.

But the new wave of developments across the Pilbara, while smaller than the last time around, is dredging up some of the same issues. The miners have already acknowledged the growing competition for skills in the Pilbara, with Rio noting labour conditions had played a part in the rise in capital costs at Koodaideri (initial studies suggested the mine would cost $US2.2bn).

Unlike last time, this Pilbara construction boom is taking place at a time when there is frenetic competition from infrastructure projects on the east coast.

“It’s fair to say there are some key skills and trades where it has become more challenging. We have to be very competitive in our offering for those key skills and trades,” Ms Gaines said.

“I do think the Fortescue culture and Fortescue brand is highly sought after and we know there are people who actively seek positions at Fortescue.”

Rio Tinto iron ore chief Chris Salisbury said there was some inflation in WA due to other projects and the broader uptick in the economy, although he noted the cost increase for Koodaideri also reflected an increase in the mine’s forecast output as well as additional infrastructure not included in the original plan.

Rio’s decision to green-light Koodaideri has provided investors another yardstick by which to measure the big three of Australian iron ore, and which the miners themselves will use to scrutinise one another.

Analysis of the forecast capital cost and production capacity of the three developments suggests Koodaideri has a significantly higher capital intensity — of around $US60 a tonne of annual production — than both BHP’s South Flank and Fortescue’s Eliwana (which both sit around $US42.50 per tonne of capacity).

Rio Tinto was quick to note, however, that Koodaideri is a true greenfield mine that will require the construction of 166km of railway and an array of new stand-alone infrastructure.

In contrast, BHP’s South Flank will be able to leverage off existing nearby rail and a host of facilities already in place.

“There is no infrastructure at Koodaideri. So that means we’re having to put in power, water, access roads, a camp, a product stock yard, 166km of rail. It’s a complete shooting match,” Mr Salisbury said.

“What I would say though is that by our estimation if you correct our project for those, if you like, unique one-off pieces then in fact our capital intensity is actually comparable to some other major projects that have been announced in WA recently.”

Fortescue will have to build around 143km of new rail to connect in Eliwana, but has helped shave its capital cost by introducing a compact plant design and salvaging second-hand gear, such as an accommodation camp from the Wheatstone LNG project and a spare gas power plant from the Roy Hill iron ore mine.

Rio Tinto noted that Koodaideri will be the most advanced mine it’s ever built, featuring the automated trucks, drill rigs and trains it has been developing over the past decade.

Fortescue, meanwhile, used its tour this week to showcase the progress it had made towards automation. While Rio was the first to explore automation, Fortescue has the biggest fleet of self-driving trucks and now expects to be driver-free in a year.

Fortescue has perfected the process of converting its existing manned trucks. Fitting the 5500 parts needed to convert each truck used to take three weeks, but Fortescue has reduced that down to less than one. Fortescue, which is using a Caterpillar-developed automation system, has also just pulled off a world-first by fitting that Caterpillar system to an old Komatsu truck.

The automation process, Fortescue says, has delivered a productivity improvement of more than 30 per cent. Ms Gaines is determined to take automation even further, right down to the buses and light vehicles that move around its operations.

Fortescue was also eager to use the trip to showcase its new West Pilbara Fines product, a higher grade material that will fetch a premium.

The West Pilbara Fines had initially been viewed with cynicism by many in the market but Fortescue is serious they can become a meaningful part of its business.

Witnessing the growing stockpiles of West Pilbara Fines at Port Hedland this week will have addressed some of those doubts.