Posco secures iron ore supply with Roy Hill stake by: David...

Posco secures iron ore supply with Roy Hill stake

by: David Winning
From: The Wall Street Journal
January 18, 2012 11:44AM

IT'S a case of keep calm and carry on for South Korea's Posco after a string of bets on Australia's resources sector went sour in recent months.
Posco yesterday said it will acquire a 15 per cent stake in Roy Hill Holdings - controlled by Australia’s richest person, Gina Rinehart - for 1.779 trillion Korean won ($1.54 billion) as it looks to secure supply lines of iron ore in the face of competition from rival Asian steelmakers.

Rising demand for steel in China and India for use in construction, shipbuilding and other industries is fuelling M&A activity in Western Australia’s remote Pilbara region, which accounts for about 40 per cent of the global trade in iron ore by sea.

The global iron trade, estimated at $US150bn ($144.57bn), has long been dominated by major miners including Rio Tinto, BHP Billiton and Brazil’s Vale.

But smaller miners with tenements in the Pilbara are racing to get projects developed and financing tied down ahead of an estimated demand increase of 100 million tonnes of iron ore annually through the remainder of the decade.

Ms Rinehart’s Hancock Prospecting already has a sizeable position in Western Australian iron ore as an equal joint-venture partner with Rio Tinto in the Hope Downs mine, which produces 30m tonnes a year.

The Roy Hill project is located about 277km south of Port Hedland, the world’s second largest iron-ore port, after the terminals at Sao Luis in Brazil. According to the Hancock Prospecting website, Roy Hill has an indicated and inferred resource of more than 2.4bn tonnes of iron ore.

Posco, the world’s fifth-largest steelmaker by market share, gained the right to take a 15 per cent stake in the Roy Hill project in early 2010.

But it waited to commit because a bankable feasibility study wasn’t yet in place, and infrastructure hurdles needed to be overcome.

In July, Hancock Prospecting was granted a licence for a 320km track that would carry 55m tonnes annually. Market participants expect a bigger track to be laid, possibly operated by QR National, to generate economies of scale and allow other miners in the region, such as Atlas Iron and Wah Nam International’s recently acquired Brockman Resources unit, to transport ore to port.

Posco, which produced 2.5 per cent of the world’s iron ore in 2010, has invested heavily in Australian companies including Cockatoo Coal and Jupiter Mines with a view to gaining exposure to rising commodity prices and, potentially, offtake of raw materials used in making steel.

However, its track record of investments in Australia is patchy. Posco built up a 7 per cent stake in Macarthur Coal at mostly higher prices than the successful $16.25 per share takeover offer lobbed by Peabody Energy of the US for Australia’s biggest producer of pulverised coal, a low-cost variety of coking coal used to make steel.

Posco also holds a 13.7 per cent stake in Murchison Metals, which has seen its share price plunge since the financial crisis in 2008 after struggling to fund its share of the proposed Oakajee port and rail venture in Western Australia. Murchison late last year agreed to sell its 50 per cent in Oakajee and the Jack Hills iron ore to Japan’s Mitsubishi for $325m.

http://www.theaustralian.com.au/business/wall-street-journal/posco-secures-iron-ore-supply-with-roy-hill-stake/story-fnay3vxj-1226247212591