west article

From today's West

Apprently the going rate for a minegate is $75/t. Also took two years to finalise the deal

Rio-Stokes deal good news for Pilbara ore minnows

25th July 2008, 7:15 WST

The Pilbara’s emerging iron ore sector is set for a massive boost after Rio Tinto and the Kerry Stokes-controlled Iron Ore Holdings signed a mine gate sales deal that will allow the junior to develop its otherwise stranded deposit.

The ground-breaking deal, under which IOH will mine and truck ore from its small Phil’s Creek mine 5km to Rio’s massive Yandicoogina operation, is likely to be pounced on by other explorers with Pilbara ground positions near Rio’s infrastructure.

The proposed deal is immaterial in financial terms to Rio, for whom the additional 1.5 million tonnes a year from IOH will barely cause a ripple to an operation that will be producing more than 200mtpa.

For IOH, however, the deal is company-defining because it allows the development of its Phil’s Creek deposit which, containing a resource so far of only 8.3 million tonnes, is far too small to justify a stand-alone operation.

Under the Rio deal, IOH will be able to turn the small deposit into a money spinner from 2010, when it is likely to generate $110 million in annual iron ore sales revenue.

Rio’s benefit, while not financial, will come from the significant political kudos it will get to offset an unfriendly reputation forged by its resolve to keep junior miners off its Pilbara infrastructure, through either track access or haulage.

Rio’s opposition is based on a claim that allowing other parties’ ore on to its infrastructure, even if only on a haulage basis, will play havoc with its finely-tuned production cycle.

The IOH deal, on the other hand, will see the junior stockpile its Phil’s Creek ore at Yandicoogina, and Rio will pick it up and blend it with its ore.

And in displaying its willingness to allow a junior like IOH to effectively access its infrastructure — on Rio’s terms — Rio has also stolen the march on Andrew Forrest’s Fortescue Metals Group which has promoted its Pilbara railway and port as open to third-party users. Despite Fortescue’s repeated proclamations, it is yet to sign binding agreements with juniors such as Atlas Iron and Brockman Resources to back up its "open infrastructure" claim.

Rio Tinto Iron Ore boss Sam Walsh, who has in the past been critical of some of the Pilbara’s iron ore hopefuls, would not comment yesterday on whether he expected to be inundated with requests from other juniors in the wake of the IOH deal.

“I don’t know, I think people know our phone number and they can obviously pick up the phone,” he said, adding that the key criteria for similar deals would be quality of ore and proximity to infrastructure. Hartleys resources analyst Andrew Muir said the Rio-IOH deal would potentially set the framework for other small iron ore projects in the Pilbara to be developed.

“Particularly in smaller deposits, if we see this sort of thing starting a trend it will make a lot of these deposits feasible because they no longer need to build a railway or get (track) access,” he said.

IOH chairman Mal Randall, a former Rio executive, said it had been working on the deal for about two years. IOH shares soared as high as 76¢ before closing up 5¢ at 62¢.

Rio and IOH would not disclose the financial terms of the deal, although the junior said it was in line with Phil’s Creek’s indicative net present value of $68 million.

It suggests IOH will receive about $75 a tonne delivered to Rio’s Yandicoogina doorstep.

Rio is selling its ore this year for $90/t fines and $125/t lump free on board, suggesting the transport component is less than 30 per cent of the overall tonnage price.

PETER KLINGER