13/05/2010 - 00:00

Next generation packs a $20bn punch

13/05/2010 - 00:00

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WA’s up-and-coming iron ore miners are not the two-bit juniors of times past, but serious players planning billions of dollars of real investment.

Next generation packs a $20bn punch

SOMETHING that seems to have been missed in the raging debate over the federal government’s planned tax assault on the mining sector is just how significant the impact could be for Western Australia if it slows the momentum of the next wave of iron ore miners.

To date, the government has chosen to focus on the big end of town, especially the vast profits that established miners such as Rio Tinto, BHP Billiton and Fortescue Metals are now churning out.

Certainly, BHP, Rio and Fortescue have been quick out of the blocks to highlight the impact the tax will have on their own plans.

Rio has confirmed it is now reviewing recently revived plans for a $10 billion expansion of its Pilbara mines to boost output by 50 per cent to 330 million tonnes a year by 2015, at the same time as approving a rival $US400 million iron ore development in “investment friendly” Canada.

BHP, which is in the midst of a multi-billion dollar rolling expansion in the Pilbara, has also confirmed all its Australian investment plans are back under the microscope, with chief executive Marius Kloppers warning the current uncertainty has made it extremely tough to approve any Australian project investments in the near term.

And with a clear nod to Adelaide, he conceded that the tax may “upset the apple cart a little bit” for South Australia’s great economic hope, the $20 billion expansion of BHP’s Olympic Dam copper-uranium mine, which has already been repeatedly deferred.

Meanwhile, FMG’s billionaire chief Andrew Forrest has repeatedly warned that the tax will significantly impinge on the company’s ability to fund a series of expansions and new mine developments in the Pilbara.

But the impact of any slowdown in investment will arguably hit up-and-coming producers even harder, because of their more modest ability to attract project finance than their bigger peers.

But it would be a mistake to equate ‘up-and-coming’ with small beer.

A quick scan of the sector reveals that the direct investment associated with the 10 most advanced mine developments planned by WA’s next generation of iron ore miners exceeds $21 billion.

And that does not include the $4 billion of infrastructure associated with developing the Oakajee deepwater port and railway needed to unlock the emerging Mid West iron ore province.

Nor does it include a suite of smaller or less advanced iron ore projects still in the preliminary stages of evaluation.

When combined, the initial production capacity of the 10 biggest and most advanced new generation iron ore projects will approach 25mt a year. That is 10-20 per cent more than either Rio Tinto or BHP’s vast operations currently export from the region annually.

To put that in even clearer context, the notional value of that production at current iron ore prices of around $100/t would be in the order of $25 billion a year.

At the current state royalty rate applied to iron ore ‘fines’ of 5.25 per cent, the extra production would translate into an extra $1.3 billion being paid by the miners to the state government every year, enough to fund a new major metropolitan hospital every year for decades.

Clearly, some projects are too far advanced for the government’s tax plans to directly slow their development.

The biggest project currently under way is the giant $5.2 billion Sino Iron magnetite mine being developed at Cape Preston in the Pilbara by China’s Citic Pacific Corporation.

The Hong Kong-listed private group, 57 per cent owned by China’s biggest state-owned offshore investment house CITIC, is already suffering from massive cost overruns and construction delays at the project, which is China’s biggest ever investment in Australia’s mining industry under direct Chinese control.

Citic Pacific maintains it is on track to begin production by the end of this year, and ramp up to its initial planned capacity of 27mt of premium quality iron ore pellets a year.

But the question remains over whether the tax impost will affect the company’s timeline for a long-term expansion to more than 70mt a year.

Far more uncertain is the outlook for the neighbouring Balmoral South magnetite project planned by Clive Palmer-controlled Australasian Resources.

A bankable feasibility study for a Sino Iron-style magnetite development costing $2.7 billion was successfully completed in mid 2008, but the project has been in limbo since China’s Shougang Steel pulled out of a deal to sole fund the development due to the global financial crisis.

A subsequent plan to merge Australasian with Mr Palmer’s budding coal and iron vehicle, Resource Development International, also collapsed in early 2009.

However, there were signs of fresh life emerging at the project with the receipt of final state environmental approvals in March.

That was before the federal government’s proposed resources super profits tax was announced, though Mr Palmer last week said Balmoral South was not one of the projects he would be abandoning as a result of the tax.

Elsewhere in the Pilbara, Aquila Resources and Gina Rinehart’s Hancock Prospecting are each aggressively working on their respective West Pilbara and Roy Hill iron ore developments, both of which are expected to cost at least $3 billion to develop.

Aquila, which is in partnership with private US miner AMCI Holdings, hopes to start producing up to 40mtpa from the West Pilbara project as early as 2013 despite the daunting task of needing to build its own railway and a deepwater port at Anketell Point, east of Karratha.

However, the port has already won support from the state government, prospective co-tenants China Metallurgical and Fortescue have agreed to work with Aquila to bring it to fruition as an export option for their own planned developments in the western Pilbara region.

Meanwhile, Hancock aims to make the 55mtpa Roy Hill project the first mine to be developed and run by the company in its own right, with a notional start date of 2014.

Ms Rinehart is yet to comment specifically on the proposed resources tax, but in an open letter published just days before the tax was announced, appealed to the government for changes to make Australia more attractive to investment or risk losing investment capital and minerals market share to rival nations such as Guinea.

In particular, she appealed for the creation of special economic zones, incorporating reduced taxation and more flexible labour import regulations, in northern Australia to boost resources investment.

Despite having major concerns over the tax, newcomer Brockman Resources remains confident of securing finance for its planned $1.3 billion Marillana iron ore project, 100 kilometres north-west of Newman, because of the project’s long life and high forecast margins. Brockman plans to produce up to 20mtpa of iron ore from the 1.6 billion tonne resource starting in 2014, with definitive feasibility studies on track for completion by September.

Taking a different tack, Atlas Iron plans to rival its bigger competitors by spending $80 million to boost its output sixfold to 12mtpa by 2012. The funds will be used to expand its existing Pardoo mine, near Port Hedland, and develop both the Abydos and Wodgina mines 100km south of the Pilbara town.

The new tax also has major implications for efforts to unlock the potential of untapped iron ore reserves in the Mid West, the primary driver behind the planned $4 billion development of the Oakajee deepwater port and associated rail network.

Four major projects are well advanced, with Gindalbie Metals having just started construction of its $2 billion Karara magnetite development in partnership with China’s AnSteel.

Close behind is Murchison Metals and Mitsubishi’s planned Jack Hills expansion expected to produce 25-35mtpa, and Sinosteel Midwest’s planned 15mtpa Weld Range mine, while Chinese-backed Asia Iron plans to start production at its $2 billion Extension Hill magnetite mine in 2012.

WA’s Chamber of Minerals and Energy said last week the tax posed a specific threat to the growth potential of the Mid West’s emerging iron ore sector. That in turn would undermine an expected doubling of mine employment in the region to 5,000 over the next few years, based on forecast mining investment of more than $10 billion.

 

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