Goldensnapper – agree with everything you said. They are just...

Goldensnapper – agree with everything you said. They are just some of the reasons why I am very comfortable with my BRM investment.

Just to clarify regarding what I meant re first on first served and queuing . FMG’s due diligence would include confirming they have a bona fide customer. Capacity is allocated following the execution of formal (legally binding) offer and acceptance documentation. If capacity is unavailable, the customer would be placed in the queue and would be allocated the next available capacity (perhaps due to end of an existing capacity contract or due to an infrastructure upgrade).

UIO – I think we are getting somewhere. The crucial issue we are discussing is whether you believe FMG have/or are building excess capacity into their infrastructure (ie above their own needs) which will be accessible on an open access basis by others. If you do, then:
… the opportunity cost you refer to is not recoverable (ie discrimination of access for a downstream benefit to the infrastructure owner is inconsistent with open access); and
… FMG will not take all available capacity for itself (alone or via a JV).

Lets assume for a minute that FMG do discriminate (ore transport depending only on blending benefit etc) and/or they claim all the infrastructure for their own use (JV or otherwise). Miners will simply seek to have the infrastructure declared via the NCC with the 100% support of the WA Government. Legal action would follow under the Trade Practices Act or an economic regulator would adjudicate access. BHP/RIO have lost all legal battles regarding access to their infrastructure so far and FMG’s case to deny access would be so weak that I would suggest they will never get themselves into this situation.

Will FMG never get access to BHP/RIO infrastructure because these two majors have/or will use it all up? FMG aren’t spending millions in court for nothing. They obviously think they can get access and the courts so far agree that they should. This is where it will get nasty. If the infrastructure is already at capacity (BHP/RIO ramp ups suggest they are going to ensure that it is) and access is granted then infrastructure capacity may need to be transferred from BHP/RIO to FMG with significant shareholder value effects (ie ramps ups may be ramped down). I note that BHP/RIO are already lobbying the Federal Government for changes to the Trade Practices Act on the basis that it threatens the BHP/RIO merger. It indicates they are not confident that they are complying with existing law and hence the need to change the law. This link explains it (http://www.theaustralian.news.com.au/story/0,25197,23177283-643,00.html).

The following quote is from FMG (http://business.theage.com.au/fortescue-hawks-49-stake-in-pilbara-project/20080307-1xtp.html). Bringing in a joint venture partner would help fund a proposed $10 billion expansion of the project, Rowley said. ``That may very well be in the infrastructure side of the business,'' Rowley said. ``We may want to hang onto the value side of the business, the iron ore, ourselves.

BRM risks lie more on confirming the success of their ore upgrade processes. My BRM investment is based on a belief that ore prices have driven technology and innovation sufficiently in the past years such that they will successfully upgrade. BRM have volume (scale economies), are using CSIRO resources to good effect and as GS states they have great management. Infrastructure risks, particularly related to ore grade, are much less risky. The Chinese will invest in infrastructure as it is infrastructure constraints rather than ore scarcity that is keeping ore prices high. FMG’s proposed $10 billion gets you a lot of infrastructure.

If blending can occur at the steel mill, this would be much more efficient than requiring it at the supplier level. This may also provide part of the answer to the concerns you raise UIO. We will all make a BRM investor out of you yet!!!

Cheers
Bleasby