New generation of resources projects

THE long-awaited announcement this month that private Perth company Perdaman was proceeding with its $6.4 billion urea project in the Pilbara was a big milestone for Western Australia’s resources sector.

So, too, was the first production this month of Fortescue Metals Group’s Iron Bridge magnetite project.

They are notable examples of an emerging trend in WA, where resources companies are investing in complex downstream processing of raw materials.

This is not a new phenomenon: companies such as Alcoa, Tronox and CITIC Pacific Mining have made big investments in value-added processing over many years.

But the growing focus on lithium, rare earths and so-called critical minerals is opening up far more opportunities and signals increasing maturity in WA’s resources sector.

This trend is all the more notable because it’s happening despite large cost blowouts.

Fortescue’s Iron Bridge is a prime example.

When the Andrew Forrest-led company approved development of its Iron Bridge project in 2019, it anticipated a total spend of $US2.6 billion, or about $3.7 billion.

The construction cost has been revised five times since then and ended up coming in at $5.6 billion, up 51 per cent.

The timeline has also blown out.

Fortescue anticipated it would be producing magnetite concentrate within three years, in 2022, but has finally reached that goal this month, nearly a year late.

Liontown Resources has suffered an even bigger percentage blowout on its Kathleen Valley lithium project.

The construction budget was hiked by 64 per cent when Liontown released a project update in January, just seven months after its board made a final investment decision.

Like many companies, Liontown bundled the news of a cost blowout with an expansion of the project scope, making it hard to ascertain exactly how much costs have risen.

Nonetheless, it’s clear skilled labour shortages, supply chain roadblocks, and spikes in the cost of workers, materials and energy have had a dramatic impact.

BCI Minerals illustrates just how tough the construction market can be.

It announced a final investment decision for its Mardie salt and potash project in October 2021, estimating at the time it would cost $1.2 billion.

Through the course of 2022, the company released a series of project updates that exposed a worsening situation.

By August, BCI halted the awarding of new construction contracts while it undertook a review and updated its costings for the project.

In November, it said the cost of some contracts had blown out by 45 per cent.

The review is still under way.

Covalent Lithium’s Mount Holland project has suffered a cost increase to about $2.5 billion. Photo: Covalent

Cost pressures have hit the bluest of blue-chip companies, including Perth-based Wesfarmers, which has teamed up with Chile’s SQM to form Covalent Lithium.

Covalent is developing the Mt Holland project, which comprises a mine in the Goldfields and a lithium hydroxide refinery at Kwinana.

Wesfarmers released new figures in February, showing the cost had jumped to between $2.4 billion and $2.6 billion. The midpoint of that range indicates a cost increase of 32 per cent.

The cost pressures are not confined to Australia.

Rio Tinto disclosed this month it was reviewing its cost estimate and schedule for its Rincon lithium project in Argentina “in response to significant local inflation and cost escalation for equipment”.

Under way

The cost pressures are particularly acute in WA because of the large number of projects under development, across resources, energy and infrastructure.

The top 10 onshore resources projects currently under way are mammoth in scale: they are investing just more than $34 billion and employing nearly 15,000 construction workers (see table).

The list is led by Woodside Energy’s Pluto train 2 development on the Burrup Peninsula, which is budgeted to cost $7.6 billion.

Pluto is being developed in tandem with Woodside’s Scarborough gas field, which is even more expensive at $8.8 billion.

However, offshore resources projects such as Scarborough have been excluded from this analysis because most of the engineering and fabrication work happens in other countries.

The big onshore projects include two major iron ore mines – Mineral Resources’ Onslow Iron development and Rio Tinto’s Western Range – both of which are in the early stages of development.

Other projects in the early stages include OZ Minerals’ West Musgrave copper and nickel project (which has been acquired by BHP) and Iluka Resources’ Eneabba rare earths refinery.

At the other end of the cycle are projects such as Albemarle Corporation’s Kemerton lithium refinery, where construction is largely complete on trains 1 and 2.

The first concrete pour has just been completed at Woodside’s Pluto train 2 gas project. Photo: Woodside

Contractors

The development of new projects is good news for mining contractors, led by Thiess.

Thiess is ranked as the largest mining services company in WA, as per Data & Insights, after two acquisitions and several contract wins.

Thiess bought Perth-based MACA last year, after MACA had bought Downer’s Mining West division in 2021.

Thiess does not publish data on its staff numbers but, drawing on public information, Business News has estimated it has 3,500 people in WA.

Its major WA clients include Fortescue, which last year awarded Thiess a $700 million contract for mining and maintenance services at Iron Bridge.

It is also contracted to provide mining services at Covalent’s Mt Holland mine.

Its MACA subsidiary recently won a three-year mine-load-and-haul contract at Atlas Iron’s newly developed McPhee Creek mine.

That’s in addition to contracts MACA has with miners such as Roy Hill Holdings, Capricorn Metals and Ramelius Resources.

Thiess sits just ahead of privately owned contractor Byrnecut and ASX company NRW Holdings.

The big mining services players include suppliers of haul trucks and other equipment, such as Seven Group subsidiary WesTrac, and Komatsu.

The sector also includes specialist drilling technology company Epiroc and drilling contractor DDH1.

Commissioning

For many big resource projects, especially those that involve complex processing, the construction phase is just the start.

Fortescue’s Iron Bridge, for instance, is now in the commissioning phase, which could be even more challenging than its troubled construction.

Iron Bridge will convert low-grade magnetite ore into a high-grade concentrate that can be fed straight into steel mills.

However, getting that process to work reliably and efficiently can take years.

It’s the same in lithium refineries: a challenge starkly illustrated at the Kwinana refinery jointly owned by China’s Tianqi Corporation and ASX-listed company IGO.

The refinery had an interrupted construction, reflecting volatility in the lithium market and Tianqi’s financial challenges, but appeared back on track when IGO bought a stake in 2020.

IGO said at the time the first production train was due to complete ramp up by the end of 2022.

That date has been progressively pushed back, with IGO’s latest update saying train 1 was expected to hit 60-70 per cent of capacity by the end of 2023 as it proceeds with rectification works.

The slow ramp up has resulted in a final investment decision for train 2 also being progressively pushed back. It was originally due in the second half of 2022.

In November last year, IGO said a final investment decision was “expected imminently”.

The project evidently ran into more issues at that time, because IGO is now saying FID won’t happen until fiscal year 2024, meaning it could be another 12 months away.

Iron ore

Despite all the challenges, there is no shortage of proponents keen to get their projects into development.

This reflects the strong market fundamentals: while costs are going up, commodity prices have risen even further.

Hence, gas producers, iron ore miners and lithium producers are all enjoying bumper profits. Technical Resources chief executive Matthew Iustini sees first-hand the impact of a very busy market.

“In my space, recruitment, the demand for people hasn’t loosened at all, it’s still very high,” Mr Iustini said.

He is endeavouring to get more people into WA from interstate and overseas but is not having much impact. “We have over 400 vacancies registered with us and that’s just white-collar workers,” Mr Iustini told Business News.

Mr Iustini said engineering design teams were as busy as they had ever been, which was a signal for what’s coming next.

“We see 2024 as being a really busy year for execution and construction of the big projects,” he said.

Much of this is driven by the big iron ore miners, which are almost constantly investing in new mines simply to maintain production volumes as older mines are depleted and reach the end of their lives.

Rio Tinto, for instance, is ramping up production volumes at its Gudai-Darri mine, after completing construction last year.

It has recently started construction of its next big project, Western Range, and is planning for its next tranche of ‘brownfields’ mine projects, to sustain output at existing production hubs.

Similarly, BHP is focused on ramping up production at its South Flank mine while planning several brownfields developments.

Likewise, Hancock Prospecting and its subsidiaries, Atlas Iron and Roy Hill Holdings, are focused on growth. The group’s latest project was the McPhee Creek mine, budgeted to cost $605 million.

Through its recently formed HanRoy entity, the group is evaluating several growth options, including the Mulga Downs mine, with production capacity of 20 million tonnes per annum, and the Hardey mine.

Matthew Iustini says his recruitment company has 400 vacancies on its books.

Flinders setback

While the existing iron ore producers, with the strong balance sheets and cash flow, are well-placed to pursue new developments, it is very difficult for new players to enter the market.

A case in point is BBI Group, which spent more than a decade trying to progress development of the Balla Balla project in the Pilbara.

Estimated to cost more than $6 billion, it involved development of a new transhipment port midway between Dampier and Port Hedland and a 160-kilometre railway to inland mines.

BBI’s foundation customer was meant to be the Pilbara iron ore project owned by ASX company Flinders Mines.

The mine was a major undertaking in its own right, with an estimated construction cost of $3.6 billion and annual output of 45 million tonnes.

Both BBI and Flinders are backed by New Zealand’s wealthy Todd family, which meant they had substantial financial resources.

BBI seemed to be on the path to development in 2017, when it signed a State Agreement with the WA government.

State Agreements are normally reserved for very large projects with high-quality proponents, so the signing was an indicator of how much support the project had gained.

However, Flinders and BBI have effectively conceded the original vision was too ambitious. They have gradually unwound their agreements over the past six months, with Flinders agreeing to buy the Balla Balla infrastructure project for $3.3 million.

The modest sale price indicates there is little remaining value in all the work done by BBI.

Flinders chair Cheryl Edwardes said these changes would allow it to pursue a more flexible and staged development of the Pilbara iron ore project.

That most likely means it will start by trucking low volumes of ore to an existing port.

Lithium pipe

The advantage of incumbency applies in other commodity sectors, such as lithium. Pilbara Minerals, which was one of the early movers, is going all-out to lift production at its Pilgangoora mine.

It is midway through its P680 project, which will lift production of lithium concentrate by 100,000 tonnes per annum to 680,000tpa.

Late last year, it disclosed a 36 per cent cost blowout on this project, to $404 million.

Despite this, in March the company said it would invest a further $560 million on its P1000 project, lifting capacity to 1mtpa.

Talison Lithium is following a similar path. It is in the midst of its CGP3 project, which will expand production capacity at its Greenbushes mine at an estimated cost of $627 million.

That will be followed by the CGP4 expansion project, which awaits a final investment decision.

The spodumene concentrate produced at Greenbushes is processed at Tianqi’s Kwinana refinery and Albemarle’s Kemerton refinery.

Albemarle has already built two processing trains at Kemerton and is expected to formally approve construction of two further trains later this year, after awarding contracts to companies including Metso Outotec, Civmec and SRG Global.

Rare earths

Another sector poised for growth is rare earths, which are a key component in the magnets used in electric cars, wind turbines and various defence applications.

ASX company Lynas Rare Earths is the only established producer in Australia.

It is expanding its Mt Weld mine in the Mid West and building a processing plant at Kalgoorlie.

Mineral sands miner Iluka Resources is going one step further.

It is planning to invest $1.2 billion building Australia’s first fully integrated rare earths refinery, at Eneabba.

Hastings Rare Earths is aiming to follow Iluka.

The ASX company is seeking to lock in funding for its Yangibana project by the middle of this year and begin construction in the September quarter.

Before it can do that, Hastings needs to complete a review of the project, which a year ago was estimated to cost $658 million.

Not surprisingly, Hasting said its current review indicated an increase in costs due to “market inflation, design growth and third-party-imposed conditions”.

Perth-based Arafura Rare Earths is also progressing at its Nolans project in the Northern Territory.

That’s after an update released late last year disclosed a spike in construction costs to $1.59 billion, up from an earlier estimate of $1.05 billion.

Arafura has been focused on signing offtake agreements to help underpin funding for its project and is targeting first production by 2025.

Like at Perdaman, the biggest challenge for these projects, in what is effectively a new industry, is funding.

Azure Capital partner Tim Balston anticipates growth in a range of ‘new’ sectors, including vanadium and potash, but it will take time.

“The normal funding sources that we get on gold and base metals projects, the commercial banks, just aren’t there yet,” Mr Balston said.

“It was the same in lithium four years ago, none of the commercial banks would touch it, but now they are all happy to finance lithium projects.

“These initial projects need alternative financing but in five years it will be a different story.”