Leaving ’22 behind to tap potential

IRON ore has extended its reign as the king of minerals in Western Australia for another year.

And with a market capitalisation north of $50 billion and revenues of $25.2 billion for the 2022 financial year, Fortescue Metals Group sits atop the heap as the state’s biggest public resources company.

That's according to Business News Data & Insights, which ranks public resources companies based in Western Australua by revenue. 

In the 2022 financial year, its last under the leadership of Elizabeth Gaines, Fortescue steamed home to another record, shipping 189 million tonnes of Pilbara ore.

It’s planning to hit a new target of 192mt this year, underpinned by two new mines: the recently constructed Eliwana and the in-development and over-budget Iron Bridge.

Fortescue’s size did not shield it entirely from macroeconomic headwinds, as a convergence of weaker crude steel production in China, sporadic lockdowns, and general inflationary pressures ate into company margins and undermined production efficiencies.

The cyclical nature of the iron ore market invariably brings speculation as to how a contracting economy in China might affect prices.

“The Chinese economy is clearly the elephant in the room,” UWA Business School mineral economist Allan Trench told Business News, drawing some comparisons to the dip in the iron ore price a decade ago.

“The big debate around that time was whether the iron ore price would materially go below $US100 a tonne.”

China’s GDP contracted by 2.6 per cent in the June quarter, according to CommSec, and the World Bank anticipates the country’s economic growth will fall behind the rest of Asia this year for the first time since 1990.

Broadly, Professor Trench said, there was an underlying expectation of price erosion in iron ore given the slowdown in China’s GDP growth, but that business would generally continue as usual.

“The fortunate thing for WA is that we still make fantastic money under $US100; there’s still brilliant money in the iron ore sector,” he said.

Bubbling away in the background is Fortescue’s renewables business and all-in bet on hydrogen in the form of Fortescue Future Industries, to which Fortescue has pledged between $US600 million and $US700 million to in FY23.

Exploration at a potential iron ore project in Gabon, marking the start of Fortescue’s potential foothold in Africa, is also under way.

Lucrative lithium

Perhaps one of the most astounding growth stories for a WA resources company has been the rise of Pilbara Minerals.

In the space of four years from 2014, Pilbara went from drilling its first hole at its flagship Pilgangoora operation to first production.

After shipping 361,035 dry metric tonnes of spodumene concentrate for the financial year just gone, Pilbara this year turned a $51.4 million loss from the prior year into a $561.8 million profit as its ramps up production at its Pilgan and Ngungaju processing plants.

Stronger demand lifted revenue by 577 per cent on the prior year to deliver total takings of around $1.2 billion for FY22.

According to Data & Insights, Pilbara has jumped from the 33rd largest resources company in the state to the eighth over the course of the year and become one of, if not the, largest pure lithium play on the ASX.

Pilbara has been praised for the launch of its Battery Material Exchange auction in July 2021.

Source: Pilbara Minerals 

The digital sales platform was initially trialled as an alternative method to sell unallocated spodumene concentrate amid a broader effort to create a more efficient and sophisticated sales channel.

Now on track for its 10th auction, the trajectory of bidding prices (see graph) has brought a new transparency to a previously opaque market and, further, offered an indication of lithium’s growing favour.

“They [Pilbara] opened up an auction house in a short market,” Canaccord Genuity senior mining analyst Timothy Hoff said.

“It was a very savvy move at this stage of the market, fair to call it a stroke of genius.”

He said it provided a data point every month that couldn’t be debated.

“It’s a real price for lithium that somebody has paid because they need the units,” he said.

Mr Hoff was confident the market now better understood lithium’s demand dynamic.

“It’s been a long time in the making those of us that went through the bust … no-one being interested in the space and being it being a really tough sell,” he said.

“I think people are finally waking up to it.”

Canaccord Genuity executive director institutional sales Digby Gilmour said fundamentals for demand had also changed.

“The sentiment is massively different this time around,” he said.

“You’ve got a recognition that there are a lot more uses, other than simply [electric vehicles]. The storage market, especially household and industrial storage, will become a huge consumer of lithium.

“And there’s not the same debate over the composite change in the battery that there used to be … lithium is accepted as critical.”

UWA’s Professor Trench was confident the abundance of hard rock lithium in the state was something to celebrate while the supply side of the market was still in its early stages.

“I think we’re the lucky state within the lucky country again,” he said.

“People sort of say ‘Oh well, lithium is having its day; but there’s lots of lithium that can be found and that could kill the market.

“But actually, you need lots of lithium to be found to transform the market.

“There’ll be lots more lithium discoveries made at surface in WA and that’s fantastic.”

Rough patch

A stalwart of WA resources, the gold sector has invariably felt the squeeze of inflation and labour costs.

According to Aurum Analytics, the average all-in sustaining cost (AISC) across Australia and New Zealand grew 9.1 per cent over the March 2022 quarter to $A1,688 an ounce and again by 8 per cent to $A1,824 an ounce in the June quarter.

Canaccord senior mining analyst Tim McCormack said simplicity, in theory, safeguarded some goldminers against swelling input costs across the sector compared to hub-and-spoke style operations using multiple mines or processing components.

“Gold Road’s Gruyere is quite insulated against inflationary pressures because it’s so simple,” he said.

“It’s an open pit, low number of trucks, low number of diggers, right next to a brand-new plant … everything’s quite efficient.”

At the top end of town, WA’s largest gold and fourth biggest resources company, Northern Star Resources, also grappled with higher costs than some analysts had expected.

The company’s all-in costs for FY22 were $A1,633 an ounce, with a further increase to $A1,690 expected in FY23.

Mr McCormack said the company’s scale meant it had fared well compared to some of its peers, however.

“Where you get benefits being Northern Star are your economies of scale and your ability to push back on suppliers who are putting through inflation, plus gouging,” he said.

“So, they are protected in that respect, just because they are such a big consumer of everything from people to explosives to trucks, they’ve just got buying power, and that helps protect the cost side.”

Mr McCormack said labour costs comprised a decent percentage of industry cost bases amid competition to win staff able to work across commodities.

“You’re up against [those] looking for like-for-like jobs in the iron ore industry that probably pay $20,000 or $30,000 more,” he said.

Broadly, Mr McCormack said, miners had a better handle on where costs might land in the next 12 months.

“There was a period there in March when COVID was really flying and inflation was starting to take off, when forecasting costs with accuracy was very difficult,” he said.

“The shackles have tightened around where they think they can control.”

Not all have made it through the period unscathed, however.

Escalating cost pressures, staff availability and issues ramping up its primary operation were contributors to Wiluna Mining Corporation’s undoing.

Administrators at FTI Consulting were appointed to the company in July.

Cost pressures also caught up with Dacian Gold, which was forced to suspend operations at its flagship Mt Morgans operation in the Laverton-Leonara district in June.

Genesis Minerals, led by Raleigh Finlayson, seemingly recognised an opportunity and raised $100 million to buy Dacian a month later.

Along the theme of Leonora consolidation, there has been speculation that Genesis might also make a play for established goldminer St Barbara, with the two believed to have been in and out of negotiations over the past few months.

The 2022 financial year was a difficult one for St Barbara, marred by COVID outbreaks and ongoing maintenance at its Simberi operations in Papua New Guinea (currently under strategic review), as well as permit issues and declining grade at its Atlantic operations in Nova Scotia.

But its Gwalia operation remains the jewel in the crown of the prolific WA gold region, according to St Barbara chief executive Craig Jetson, who is leveraging the company as key to any consolidation deals that might take place.

He, too, flagged that people, or a lack thereof, remained the company’s biggest risk to achieving its development plans.

Next steps

The widely held view in the sector is that 2022 has been a tough time to start development of a new mining project.

New producer Red 5 cut the ribbon on its King of the Hills operation in Leonora earlier this year and had been fortunate to avoid major cost hikes and delays after locking in a fixed engineering, procurement and construction contract before pandemic[1]related shortages gained momentum.

MACA Interquip, which completed the work on King of the Hills alongside Macmahon, later said in its full-year report that the division had underperformed financially after copping cost overruns due to the tight specialist sub-contractor and labour supply pool in WA.

Companies seeking to build projects in the coming years have had to reckon with a new operating cost environment.

A pre-feasibility study for De Grey’s new $1 billion Mallina gold project in the Pilbara showed costs had escalated by around $160 million since a scoping study in October 2021.

And in a big move for WA’s nickel and copper sector, OZ Minerals earlier this month pushed the button on its West Musgrave copper-nickel operation, estimating capital costs at $1.7 billion, $600 million more than its pre-feasibility study.

“The contractor is a key cost for the miners,” Canaccord Genuity’s Mr Gilmour told Business News.

He said while the sector had started to report a freeing up of labour markets, there was a broader belief among industry that migration allowances needed to be addressed.

“There’s no shortage of industry agreement that there needs to be greater allocation to skilled migration,” Mr Gilmour said.

“Most companies recognise that it’s a necessity.”

Pit Crew Consulting has previously reported a national resources labour shortage of around 75,000 people, tipped to peak at 84,000 in 2024.

“But it also depends on core commodity markets; if they roll over, then the demand for workers will naturally abate,” Mr Gilmour said.

Though there are plenty of operating challenges for WA, the global energy transition has brought with it opportunity.

“The WA resources industry could have its best decade ever,” Mr Gilmour said.

“It’s supported by the stalwarts of the mining industry, such as iron ore and gold. But you’ve got a lot of growth rolling through in battery and critical minerals.

“And arguably those are not so much cyclical but more of a structural shift.”

Among these include the budding rare earths market, in which a spate of new explorers has taken to the market, while others including Lynas Rare Earths work to further cement themselves as global suppliers.

“Mount Weld is just an amazing asset in WA for the hard rock rare earths,” UWA’s Professor Trench said, noting that there was still execution risk to consider for its $500 million expansion at the mine.

“And then we’ve got this new group of little juniors that are emerging, looking at clay hosting shallow, heavy rare earths around WA.”