Industry related to SDL,talktomeChina Leads Record Low-Grade Ore...

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China Leads Record Low-Grade Ore Spending to Counter BHP, Rio

By Rebecca Keenan and Jason Scott

Nov. 25 (Bloomberg) -- Citic Pacific Ltd., an arm of China�fs biggest state-owned investment company, is leading record spending on low-grade iron ore mines in Australia to profit from surging demand as well as to diversify supply.

As much as A$18 billion ($16.6 billion) is being spent on so-called magnetite iron ore projects, 36 percent more than a year ago, according to data from the Australian Bureau of Agricultural and Resource Economics. Citic Pacific this month said it signed sales accords for its $4 billion project.

China is pumping cash into developing the mines as its steel mills are forecast by Rio Tinto Group to consume more iron ore during the next five years than Australia has shipped throughout history. Bankrolling rival suppliers will help counter the market dominance of Rio and BHP Billiton Ltd., the world�fs second- and third-largest exporters, who are forming a production joint venture in Australia.

�gIf this BHP-Rio joint venture goes ahead, the Chinese will feel even more under threat,�h said Peter Chilton, who holds BHP and Rio shares at Constellation Capital Management Ltd. in Sydney. �gThere are a lot of small projects on the go. If China takes more direct control of these and promotes them with an Australian partner or on their own, at least it guarantees them extra supply.�h

Citic Pacific gained 0.5 percent to HK$21.40 yesterday. The stock has more than doubled this year. Rio, whose relations with China hit a low in July with the arrest in Shanghai of company iron ore executive Stern Hu, declined 0.7 percent to A$71.37 at 11:20 a.m. Sydney time on the Australian stock exchange.

China Mills

Baosteel Group Corp. and Anshan Iron and Steel Group are among steelmakers helping develop projects to mine the lower- grade ore, shunned by Rio and BHP, who ship higher-grade hematite from Australia, the world�fs biggest exporter. Prices have more than tripled this decade as demand for steel used in construction, cars and washing machines surged.

�gThe Chinese are prepared to invest in longer-term projects that otherwise would never be built,�h Evy Hambro, who helps manage BlackRock Investment Management Ltd.�fs flagship $11.6 billion World Mining Fund, said in an interview in Melbourne. �gProjects that would not necessarily get banking finance from Australian or European or U.S. banks might now get project finance from Chinese customers or Chinese banks.�h

Australia has two operating magnetite projects at Grange Resources Ltd.�fs Savage River in Tasmania and OneSteel Ltd.�fs Whyalla Steelworks in South Australia. They each produce less than 2 million tons a year, compared with Citic Pacific�fs 28 million-metric-ton Sino Iron project. That mine at Cape Preston, 100 kilometers (62 miles) southwest of Karratha in Western Australia�fs Pilbara region, is scheduled to start in the fourth quarter next year.

Making Sense

�gIt�fs only the Chinese who can make the magnetite make sense to them at the moment,�h said Romano Sala Tenna, who helps manage A$35 million at Perth-based Katana Capital Ltd. �gThey do see the long-term need.�h

Magnetite has higher production costs than hematite because it needs more processing. Hematite ore accounts for about 96 percent of Australia�fs output, according to Gindalbie Metals Ltd. To drive the processing plant at its project, Citic is building a 450-megawatt power station. That capacity is equivalent to the current energy needs of the entire Pilbara region, which hosts 18 iron ore mines operated by Rio and BHP as well as other mines and towns.

�eTest Case�f

Resourcehouse Ltd., which has mining rights to 10 billion tons of magnetite ore, aims to raise as much as $3 billion in an initial public offering in Hong Kong, according to a term sheet sent to investors. It will cost A$2.7 billion to build the iron ore mine, according to IPO co-manager, Macquarie Group Ltd.

Perth-based Atlas Iron Ltd. has hired Goldman Sachs JBWere Pty to help it sell a majority stake in its Ridley magnetite project, estimated to cost A$3 billion to develop. Construction of Gindalbie�fs A$1.8 billion Karara project in Western Australia with Anshan Iron started last month, Gindalbie Chief Executive Officer Garret Dixon said in an interview. First production is scheduled for 2011, he said.

The Sino Iron magnetite project �gclearly must be seen as a test case for the whole of the industry and Australia,�h Barry Fitzgerald, chief executive officer of Citic Pacific�fs Australian unit, said in an interview. �gThere�fs a specific need for our product. China demand will continue.�h

China�fs economic growth may accelerate to 10.5 percent this quarter, according to a Bloomberg survey. Ore imports reached a record in September and prices may rise 5 percent to 10 percent next year as suppliers have more pricing power, Nanjing Iron & Steel United Co. said Nov. 19.

�gHematite is first choice, but the Chinese objective is probably a little different,�h said Grant Craighead, a mining analyst at Sydney-based Stock Resource. �gThey�fve got more the 100-year view that �ewe need to be putting our foot down on resources.�f�h

To contact the reporter on this story: Rebecca Keenan in Melbourne at [email protected]

Last Updated: November 24, 2009 20:21 EST