06/06/2012 - 10:54

Full steam ahead for the Roy Hill express

06/06/2012 - 10:54

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The Roy Hill iron ore development will be a test of Gina Rinehart and her ‘team’.

The Roy Hill iron ore development will be a test of Gina Rinehart and her ‘team’.

IF BHP Billiton and Rio Tinto have slowed, perhaps temporarily, mining-project investment decisions, why is Gina Rinehart charging full-steam ahead with her part-owned $10 billion Roy Hill iron ore development?

The answer could be that the recently crowned world’s richest woman is more optimistic about future demand for iron ore than the top two miners, or that she is confident of priority treatment from Asian steel mills keen to encourage alternative sources of iron ore supply.

Those two reasons are the optimistic assumptions for why Mrs Rinehart is pushing ahead with a greenfields project, and all the challenges that status entails.

On the flipside of the Roy Hill development decision is a pessimistic possibility that she does not have the forward-looking intelligence gathering systems embedded in BHP Billiton and Rio Tinto, meaning Mrs Rinehart and her South Korean partners are walking into a quagmire.

A checklist of positives and negatives is currently weighed down by a depressing list of problems, including:

• Europe’s ongoing financial meltdown, which has started to infect Chinese economic growth;

• grave uncertainties about the health of the global banking system;

• union activists putting Roy Hill at the top of their hit list because of Mrs Rinehart’s strong political beliefs, and big win with her request to use foreign ‘guest workers’; and

• high and rising costs in Australia’s overheated, and skills short, resources sector.

On their own, each one of those issues can be managed. When they arrive at the same time there has to be a question hanging over the timing of the Roy Hill project, and whether it too will be delayed.

Europe’s woes, while geographically far from Australia, are sending shockwaves through the banking system. And while Mrs Rinehart has oodles of money she is not going to risk a large chunk of her fortune on a project that might struggle to be built on time, or on budget, and if it did, walk into a depressed iron ore market.

What Mrs Rinehart is likely to discover is that even with National Australia Bank as a lead banker her second bank, Banque Nationale de Paris (BNP), is at the centre of Europe’s malaise and will struggle to bring fellow European banks to the Roy Hill funding party.

Unions, always a thorn in Pilbara progress, have a new favourite class enemy in Mrs Rinehart, perhaps displacing their long-term object of hate, Rio Tinto.

The anger in the union movement at being outsmarted over the guest worker issue by Mrs Rinehart, and the federal government, which has cleared the way for short-term foreign labour at major projects, will boil over at Roy Hill, but exactly how remains to be seen.

And, even with the right to import up to 1,700 overseas skilled workers, there is no guarantee that Roy Hill will be able to find the rest of the workforce it needs in the local pool of skilled labour without being forced to pay exorbitant wages and bonuses.

Contractors who win work at Roy Hill will face exactly the same issues, and they will treat the project as a high-risk assignment with the potential to blow a hole in their balance sheets should they not get appropriate insurance from the owners – which is yet another cost to be layered on the project.

There is, unfortunately, a further issue that will severely test the Roy Hill project – the unknown calibre of the management team in charge of the project, or in Mrs Rinehart’s office.

Despite her high profile, Mrs Rinehart has always operated a very lean business with a small staff of trusted advisers, and a range of outside consultants, who will be stretched to the limit in managing all the issues heading their way at Roy Hill.

Being a one-woman band for the past 20 years, which is one way of describing Mrs Rinehart, will not be sufficient to undertake the development of a world-class resource project – especially at a time when much bigger miners are stepping back until troubled conditions settle.

Facebook overextends

THE failed float of Facebook has been put down to bankers over-pricing the initial public offering, but long before the writs started flying after the stock crashed there were doubts about the business case underpinning it, and all other forms of social media.

Advertising, as with conventional media, is supposed to be the core cash generator for Facebook, with the website offering a chance to reach billions of consumers around the world.

Those consumers, in turn, are supposed to use Facebook as a means of modern communications, which enables them to keep in touch with friends and make new friends.

There are two problems with that structure. Advertisers, apart from a handful of global brands, do not want to reach billions of consumers, and members of the Facebook fan club are discovering that really isn’t possible to have hundreds, let alone thousands, of friends.

Smarter people than Bystander will eventually provide a better analysis of Facebook, but history suggests small groups achieve the best results in business (and in the military).

The Roman army of a few thousand years ago discovered an ideal number of around 80 for its individual units because that was how many people commanders could learn to trust at any time.

In his seminal work, The Tipping Point, Malcolm Gladwell also explored the importance of tight-knit working groups.

Boiled down, small groups of people with common interests work well. Big groups are called a mob, and they don’t work at all.

Point of tax

SLOWLY, ever so slowly, Canberra bureaucrats and east-coast politicians, are waking to the awful reality that their attempt to hit the mining industry with a super-tax on profits has failed, as it was always going to.

What the non-miners in charge of Australia did was apply their tax at the wrong point, based on an assumption that the resources boom would last for decades and so would the profits – which is why the states have always ‘taxed’ minerals at the point of production with royalties, leaving the problem of profits to someone else.

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“It’s amazing how nice people are to you when they know you’re going away.”

Michael Arlen

• The next Bystander column will be filed from London later this month.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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