Mining construction boom to taper off but still a long way from collapse

At the very end of an extraordinary week, a late announcement from an unlikely source – Transport Minister Troy Buswell – gave one of the few clear signals about future growth in the mining sector.

JUST before 6pm last Friday, when many people were enjoying a drink after work or heading home, Troy Buswell’s office announced approvals for three new developments at Port Hedland.

One hour later, iron ore miners BHP Billiton and Fortescue Metals Group issued their own announcements, welcoming the minister’s decision.

Those releases provided some clarity on where the mining sector was heading, after days of speculation about whether or not the boom was over.

The message they sent was this: don’t expect new mega projects to be launched any time soon, but watch out for cost-effective, incremental expansion projects that will keep the mining sector in a healthy state for years to come.

BHP, for instance, will be able to proceed with two new wharves in the existing inner harbour at Port Hedland. 

FMG will be able to build a fifth wharf, costing about $250 million.

And most significantly, North West Infrastructure – which is effectively Atlas Iron and Brockman Resources – has been given approval to proceed with two new wharves at South West Creek.

None of these port developments will happen in isolation; they will underpin further investment in iron ore mines and rail infrastructure in the Pilbara.

BHP, for instance, believes there is potential to ship substantially more than its official allocation of 240 million tonnes per annum through the inner harbour.

In a similar vein, FMG chief executive Nev Power believes the inner harbour’s total capacity can be increased beyond the current cap of 495mtpa.

And Atlas managing director Ken Brinsden has described the new berths as pivotal to its plan to expand output to 46mtpa by 2017.

Friday’s announce-ments helped bring some perspective to the debate over the longevity of the mining boom, which in Western Australia is focused on the Pilbara iron ore industry.

Just two days earlier, BHP chief executive Marius Kloppers announced the scrapping of the giant Olympic Dam mining project in South Australia and the indefinite deferral of its outer harbour project at Port Hedland.

Even on that front, BHP is saying that development of the 50mtpa first phase of the outer harbour “would deliver a value-adding investment return as a stand-alone project”.

“But (it) is not our best option right now,” BHP iron ore president Jimmy Wilson said on Friday.

BHP’s newfound capacity to pursue incremental expansion of its port capacity, initially through the inner harbour and then the outer harbour, puts it in a similar position to iron ore rival Rio Tinto, which is able to pursue incremental growth of its iron ore business by adding extra berths at its Cape Lambert port.

The expansion costs for BHP, though, would be much higher, as the outer harbour involves extensive dredging and construction of a new finger wharf.

Five growth themes

Looking at WA’s mining sector as a whole, there are several themes that characterise its growth prospects.

First, there is enormous investment already locked in. Mining and mineral processing projects with a total capital cost of $54 billion are currently under construction in WA (see attached lists).

Of that total, at least two-thirds is yet to be spent, which is why construction contractors such as Monadelphous and Decmil are comfortable with the outlook for the next couple of years.

Second, the iron ore sector’s dominance of WA’s mining industry is becoming even stronger. Once projects like the Tropicana gold mine and the DeGrussa copper mine are completed, there is very little else on the horizon. 

Commodities such as nickel and uranium remain depressed and while the gold outlook is promising, planned projects in that sector are of a much smaller scale (see Pipeline slows as big projects near completion, and next week’s junior miners feature).

Third, there are very big question marks over some greenfields iron ore projects that in the past had been considered almost certain to proceed.

Grange Resources’ Southdown project near Albany, Aquila Resouces’ West Pilbara iron ore development, and the big new mines planned for the Mid West all face a more challenging environment.

The slowdown in world growth, the slump in iron ore prices and the tightening of debt markets have conspired to make life more difficult for these projects.

Even Hancock Prospecting’s majority-owned Roy Hill project is not guaranteed. Project company Roy Hill Holdings still needs to borrow about $7 billion before it can complete the estimated $10 billion development.

Fourth, having access to port facilities continues to be the single biggest issue facing miners looking to develop bulk commodity projects.

In the Mid West, for instance, miners with access to Geraldton port are okay. These include Karara Mining, which is set to start ramping up production at its newly built mine-and-process plant.

But most other mine developers in the Mid West are dependent on a new port being built at Oakajee, with supporting rail infrastructure, and there is no sign of that happening any time soon.

In the Pilbara, Aquila’s project is reliant on a new port being developed at Anketell Point, near Cape Lambert.

And the growth of the Yilgarn as an iron ore province is dependent on new export facilities at Esperance. That process is under way but its still early days (see Esperance port expansion to put Yilgarn iron ore producers in the box seat).

Fifth, and just to be clear, there are two mining booms; and they often get muddled.

There is a boom in mining construction, and that inevitably will wane as the mega projects currently under way in the Pilbara and elsewhere are completed.

The expected slowdown in mining construction has already hit Perth’s engineering design firms, which are a leading indicator of future activity. In some cases, such as those of Calibre Group and WorleyParsons, they have started to cut staff numbers.

Of more lasting value will be the boom in mining output that will follow completion of the construction projects. 

The most spectacular growth will be in WA’s iron ore production, which is set to reach about 800mtpa in two years’ time – four times the level of a decade ago.

With this growth comes an enormous amount of operational work, as well as contracting opportunities for companies that service and maintain the mines and their mining equipment.

With deference to Resources Minister Martin Ferguson, we should note there is a third type of mining boom.

After Mr Ferguson famously called the end of the boom last week, he clarified the statement to explain that he was saying we had already passed the peak in commodity prices, not the peak in mining construction or mining output.

Likely growth projects

Looking ahead, the most likely scenario is that established miners will dominate future growth and become more dominant.

Rio Tinto, for instance, will lift its annual production rate from about 230mtpa currently to 283mt by the end of 2013 and 353mt by 2015.

It has made no secret it is studying growth options well beyond the 353mt.

Similarly, BHP is in the process of lifting its annual production and export capacity from 180mt currently to 240mt, and also aspires to go well beyond that.

Both companies have the resources in the ground, the potential to incrementally expand their rail and port infrastructure (at Cape Lambert and Port Hedland respectively) and the financial capacity to invest in growth.

The timing and scale of that growth will depend on global economic trends in general and the future course of iron ore prices in particular. 

It’s a similar story at FMG, currently steaming ahead with its T155 expansion project, which will nearly triple annual production capacity by the middle of 2013.

Beyond that, the company is evaluating a variety of expansion projects and aiming to get them ‘push button ready’ for an uptick in the iron ore market.

Mr Power said last week the immediate aim was to complete its T155 expansion project, and reduce debt to sustainable levels.  

He also explained that future growth would be less capital intensive.

All of which points toward the likely development of the Nyidinghu deposit, which is located near its existing Cloudbreak mine (see attached map).

Its greenfields Western Hub project, which requires construction of a new port at Anketell Point and a new railway, had been a major focus but is now considered more of a long-term proposition.

The Pilbara’s fourth producer, Atlas Iron, is in the process of expanding production from 6mt to 10mt, with new mines at Mt Dove and Abydos.

That will be followed by a new mine at Mt Webber, lifting capacity to 15mt.

Importantly, all of these projects utilise road transport and the existing Utah Point berth at Port Hedland, which caps the collective cost at a modest $670 million.

Much more ambitious is Atlas’s plan to lift capacity to 46mt by 2017. Gaining approval last week for the NW Infrastructure berths was one important step down that path. 

Partnering earlier this year with QR National to study rail options was another step forward.

Aspiring miner Brockman Resources (which also has a capacity allocation at the NW Infrastructure berths) has subsequently joined the rail studies.

Its Marillana project is located near some of Atlas’s south-east Pilbara projects.

Chinese group CITIC Pacific, which has been hit by numerous delays and cost blowouts on its Sino Iron magnetite project, will join the ranks of Pilbara producers later this year. The cost is estimated to be about $8 billion.

Apart from these companies, there are many other aspiring iron ore producers in the Pilbara.

Mineral Resources is one that is starting small, with its Phil’s Creek project currently under construction, but still awaiting final mining approvals and an infrastructure solution.

Iron Ore Holdings is another aspiring miner; so far, it has made tidy profits by selling projects (including Phil’s Creek) to other companies.

The most significant new project is the $10 billion Roy Hill project, which is already under way but still needing substantial debt funding.

Once completed, it will produce 55mtpa, using its own mine, rail link and berths at Port Hedland’s South West Creek.

Next on the horizon is the West Pilbara project, half-owned by Perth company Aquila Resources.

Progress on this 30mtpa project has been complicated by the fact that its preferred port site at Anketell Point was also being eyed by FMG, for its Western Hub.

The pressure on Aquila was highlighted by its announcement last month that it was looking to conserve funds “until the timeline for approvals is more certain”.

Aquila and its joint venture partner have agreed to move to minimum expenditure and review relationships with third party service providers.

Separately, a project team is exploring ways of minimising capital expenditure, as part of the project’s definitive feasibility study.

This puts Aquila in a similar position to most of the companies looking to develop greenfields projects in the Mid West.

The Mid West project most likely to proceed is Asia Iron’s Extension Hill magnetite development, which is planning to use Geraldton rather than the planned Oakajee port for its exports.