spot on

Territory May Turn the “Tyranny of Distance” to its Advantage


By Our Man in Oz



Separating sheep from goats is normally a job for farmer Brown. In Western Australia last week a couple of mining company bosses indulged in a bit of verbal culling. From the top (and bottom) end of the iron ore industry came warnings that the time is fast approaching when the 80 small iron ore “sheep” promising to develop mines will be cut back to a more manageable flock. From the big end of town came rumblings from Rio Tinto iron ore boss, Sam Walsh, who warned that many of his small rivals would not deliver on their promises. From the small end came a surprisingly similar observation from Territory Resources boss, Michael Kiernan, who has successfully started exporting iron ore, but reckons a lot of the hopefuls he’s looked at will never ship a tonne of the stuff – and some might even become tasty takeover targets for him.
The common view of the two men, who are approaching the industry from opposing directions, should serve as a warning shot across the bows of investors thinking about a spot of fresh speculating in the boom which has gripped the iron ore sector. To continue the farming analogy, the sheep might safely graze as China demands ever increasing tonnes of raw materials for its steel industry - but the goats are heading for the knacker’s yard.

Walsh, who has a rod of steel running through an apparently soft exterior, delivered his cautionary sermon to a number of reporters after escorting them on a tour of Rio Tinto’s iron ore operations in the remote Pilbara region of WA. The initial reaction of Walsh’s audience was reminiscent of an old and familiar bon-mot from the Profumo scandal: “Well, he would say that, wouldn’t he?” The feeling was that Walsh was “talking his book” as the man charged with running Rio Tinto’s most important division during the company’s defence against a proposed takeover bid from arch-rival, BHP Billiton. “A lot of people are making bold statements,” Walsh was quoted as saying about the junior iron ore stocks, “what guarantees are there that these companies will bring on these deposits themselves?” Kiernan’s reaction was that Walsh was being “a little naughty” in rubbishing the small players in the iron ore game, but then admitted that: “he’s probably right”.

The common thread linking Walsh and Kiernan is Australia’s great nemesis: distance. Books have been written about this subject, including a history classic by Professor Geoffrey Blainey: “The Tyranny of Distance. How Distance Shaped Australia’s History”.

What Blainey saw in 1966 remains as true today. Nothing is “just down the road” in Oz. It’s all a bloody long way off. For miners wanting to haul a relatively low-value bulk commodity such as iron ore (or coal) the challenge is not finding a deposit, it is finding a railway and port to get it to the customer.

In Rio Tinto’s case that is not such a problem because it has been building and operating iron ore railways in the Pilbara since two years before Blainey wrote his book. For new and wannabe iron ore miners it’s a case of hitching a ride off someone else’s transport infrastructure (not easy), build your own (too expensive), hope that a government builds it for you (dream on), or discover a resource close to a rail line and port. The latter is what Kiernan did, illustrating that he has a tighter grip on how to run a successful mining business in Oz that most of his newcomer rivals.

The key to Territory, which is still a truly modest iron ore producer with an even more modest resource base, is the combination of the freshly laid Adelaide to Darwin rail line that runs past the front door of its Frances Creek mine, and the port of Darwin which is super-keen to boost tonnage. “The Northern Territory government has been fantastic,” Kiernan told Minesite in his Perth office. “It has done everything possible to encourage us.” That’s all added up to the shipment of 350,000 tonnes of ore in the half-year to December, and a target of lifting annualised output to 2.5 million tonnes a year by the end of 2008, and then up to three million tonnes a year. Given that Territory is getting roughly US$100 a tonne in the booming spot market it’s easy to see why Kiernan is cracking the whip over his crew to squeeze maximum production from the mine.

“We’re making a pretty good margin right now with costs running at A$60 a tonne,” he said. “The aim is to get that down to around A$40 a tonne because it’s likely that the price will fall over the next few years.” Kiernan’s other aim is to boost his resource base from the current reserve of 4.8 million tonnes at 61.3 per cent iron, supported by an additional 9.7 million tonnes at 60.7 per cent in the resource category. A busy drilling programme is underway, prompting Minesite’s Man in Oz to comment that he had had this conversation with Kiernan 10 years earlier when he inherited control of the unloved Woodie Woodie manganese mine which at that stage needed someone to get the transport economics sorted and the reserve position boosted. “Spot on,” he said. “We’ve both been here before.”

Most small miners in Australia have not been where Kiernan, or Minesite’s Man in Oz, have been. Both have seen how markets fluctuate and how Blainey’s tyranny of distance is forgotten when a boom inflames optimism. As reality dawns, consolidation takes place and while Walsh can only rubbish the juniors yapping at his heels, Kiernan smells opportunity. “Quite clearly, the small companies which don’t have access to rail or port have a seriously hard road to travel,” he said. “They will have trouble getting up, and it’s just been made tougher by the sub-prime credit crisis.”

One man’s fish is another man’s “poisson”, as someone once said, and in Kiernan’s case cash flow from Frances Creek, plus strong financial backing from Richard Elman’s Noble Group, means that Kiernan might soon be on the takeover trail seeking to replicate his “train and port” iron ore formula. If that bit of speculation on the part of Minesite’s Man in Oz is correct then the names most likely to be on Kiernan’s desk are Atlas Iron and BC Iron. Atlas because it is “just up the track” from Port Hedland, and BC because it is about 30 kilometres from the new Fortescue Metals rail line. Whether Kiernan chooses to move on Atlas or BC is an interesting debating point, as is the fact that BC is chaired by his brother, Tony. Food for thought!