macro vista for byl

Is BYL's $300 million RIO contract a fat-tail event, or is it the kind of business that BYL, and others in the earthmoving game, can expect from the WA iron ore sector? I started with the gut-feel that at the macro level, there are more deals like this in the offing (some large, some small) because iron ore miners are going to continue to expand mining in both brownfield and greenfield sites as long as the price of iron ore landed in China exceeds the landed-in-China cost by a fat margin.

China is used here as a proxy for the iron ore market, but there are other established and new markets. It's global urbanisation that drives the consumption of steel, and Chinese urbanisation and steel exports to other urbanising countries is a large part of the story.

After a few hours of investigating, I am now more concerned that BYL may be seduced into taking on too much work, rather than not finding enough to keep its fleet and people busy. I'll keep a wary eye on profitability and balance sheet strength going forward.

Converting iron ore tenements into producing mines usually requires some or all of the following: railwork; roadwork, site preparation, overburden stripping, constructing tailings dams and expansion of port facilities. Some “brownfields” projects are low-cost, but what is low-cost for a miner is juicy business for the likes of BYL.

For relatively small DSO (direct ship ore) deposits, it makes sense to retain the civic works service provider to subsequently mine the ore, as was the case for BYL at Karara Mines Limited. In larger sites, the mining service could be limited to early-stage mining, perhaps with options to allow the contract to morph into a dry-hire contract. One can see this mixture of civic works and mining services in BYL's recent RIO contract, and in the 4.5 year, $500 million, contract that DOW secured from Roy Hill Iron Ore Pty Ltd., where the long-term plan is for an owner-operated mine – see http://www.downergroup.com/search/search.aspx?q=Roy%20Hill.

The recent RIO 4.5 year contract relates Western Turner Syncline Stage 2 Project. Before the contract expires, new RIO contracts will be in the offing – e.g., greenfield mines at Koodaideri and Silvergrass may be built fairly soon – see http://www.smh.com.au/business/rio-tinto-unveils-new-growth-plan-halving-expansion-costs-20131128-2ye6r.html#ixzz30rZ91G1P

Let us look at the expansion plans of three of BYL's past and current customers – Atlas Iron, Mount Gibson Iron and Fortescue. If one searched the Internet for expansion plans of other iron ore miners, more project would be found. Where the material in the link is substantially relevant, I'll only supply the link.

http://www.atlasiron.com.au/IRM/Company/ShowPage.aspx/PDFs/5255-10000000/MtWebberexpansionto6Mtpaapproved

http://www.fmgl.com.au/Our_Business/Expansion_Projects/Iron_Bridge
http://www.fmgl.com.au/UserDir/AsxAnnouncement/1246243724.pdf

NWH has the jump on the Iron Bridge Project – see http://www.fmgl.com.au/UserDir/News/en/Media%20release%20-%20Significant%20milestone%20for%20Njamal%20Traditional%20Owners225.pdf

The snippet below from http://www.mtgibsoniron.com.au/wp-content/uploads/2014/04/28-04-2014-Media-Release-Mount-Gibson-achieves-50Mt-iron-ore-exports.pdf refers to the hematite deposit at shine that Gindalbie recently sold to Mount Gibson. BYL has been mining in that area for Karara Mines Limited, a Gindalbie associate, so it should be sniffing for work at Shine. The snippet reads, “We look forward to producing our next 50 million tonnes as we ramp-up operations at Koolan Island, extend our Mid West business through the development of new opportunities such as the Shine hematite project, and advance exciting near-mine exploration programs around our Extension Hill mine.” BYL has in the past secured work from Mount Gibson Iron Limited – upgrading 85 kilometres of unsealed road from Perenjori to Extension Hill in WA's Midwest region.

There is going to be heaps of BYL-suitable work for many years in WA's iron ore areas. An hour ago I read about the takeover offer for Aquilla - the bid manifests Baosteel's frustration with lack of progress made in the West Pilbara Iron Ore Projec. Three paragraphs from http://www.theaustralian.com.au/business/mining-energy/aquila-in-play-as-baosteel-loses-patience/story-e6frg9df-1226906587240# are pasted below. This is a $3 billion project that includes railway construction and port development at Anketell.

Baosteel Resources vice-president and chief financial officer Wu Yiming said the company, which has a stake of about 20 per cent in Aquila, took a position in the company in 2009 to assist the development of its iron ore and coal projects.

The jewel in the crown is the $7.4bn West Pilbara iron ore project in Western Australia and the Eagle Downs coking coal project in Queensland.

“After five years we haven’t seen any projects started. We have been very patient but we have become frustrated,” Ms Wu said. “What we are going to do now is get things started. If our bid is successful our intention is to progress development of the Eagles Downs and West Pilbara iron ore project.”