10/02/2011 - 00:00

Rinehart riches set to soar with new mines

10/02/2011 - 00:00

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The figures might look good for Gina Rinehart now, but there’s plenty of upside.

Rinehart riches set to soar with new mines

HOW rich is Gina Rinehart? Last week’s valuation by Forbes magazine of Western Australia’s resources queen was $US9 billion, which caused a few jaws to drop in a combination of awe and disbelief.

Awe because $US9 billion is a big number; disbelief because of the speed at which her wealth has accelerated from the $US2 billion put on her in the 2010 valuation exercise.

Missing from comments and criticism was an understanding of how that monster figure emerged, and the deeply conservative assumptions behind it, because if you put on a pair of rose-coloured glasses, and assign value to assets that Forbes did not, then Mrs Rinehart is a lot wealthier than $US9 billion.

How about $US20 billion, as a starting number – value that would rank her as Australia’s 15th biggest company – if you could list people on the ASX?

For a bit of light relief, let’s go for a wander through the Forbes valuation, in which I played a part, and which I reckon is pretty close to the mark on the assets Mrs Rinehart currently has in production.

But, after considering the conservative approach, it is fun to stretch the wealth envelope.

Most of her fortune flows from the Hope Downs mine, currently a series of three pits producing 30 million tonnes of iron ore a year, with 15mt being her entitlement as a 50 per cent owner alongside Rio Tinto, the operator of the mine.

Her 15mt are currently sold for $US150 a tonne, generating revenue of $2.25 billion. The cost of production is around $US35/t, meaning that $US1.7 billion hits Mrs Rinehart’s accounts as gross profit. In theory, she could sell her share of Hope Downs tomorrow for at least $US8 billion, and perhaps a lot more.

Then there is famous half-share in the Rio Tinto royalty shared with the heirs to the estate of EA (Peter) Wright.

Her half is currently estimated to be spinning out somewhere close to $US100 million a year, a cash stream that would fetch around $US1 billion if sold.

As a side comment, before donning the rose-coloured specs, it is amusing to note that Mrs Rinehart and her staff have been ‘talking down’ the value of the royalty, whereas once they were happy for it to be seen as the jewel in the family crown.

Why anyone would talk down the value of an asset, even if it were being overvalued by journalistic exuberance, is a mystery. Perhaps too much money is as big a nuisance as too little.

Now, on with the specs. Hope Downs is in the process of expanding to 45mt (Mrs Rinehart’s share 22.5mt). The spot (overnight) price of iron ore is $US200/t. At the higher tonnage and higher price her revenue explodes (from that one mine) to $US4.5 billion, and assuming the same cost of $US35/t her annual profit hits $US3.7 billion.

The future tonnes at Hope Downs are a near-certainty. The higher price is not. But the optimistic view provides an insight into her extreme wealth.

Any variation on those numbers maintains Mrs Rinehart at around the $US9 billion mark; what catapults her into the stratosphere (and a ranking as an Australian top 10 business) is future iron ore production at Roy Hill, a mine rapidly taking shape, and coal in Queensland.

Neither Roy Hill nor Queensland coal nor any of the other assets on her books was used by Forbes for valuation purposes because they are not yet in production – a harsh but important part of accurate valuation. As for debt, a conventional deduction for most people, why would she need any with her current and future cash flows?

For a less conservative valuation there is little doubt that Roy Hill today does have some (considerable) value because it has South Korean partners to fund development, has cleared most government approval hurdles, and will become a 55mt-a-year mine.

If Mrs Rinehart does with Roy Hill what she did with Hope Downs (keeps half and let’s her partner run it) she will be entitled to a further 27.5mt of iron ore, generating annual revenue at today’s price of $US150/t of $US4.1 billion.

It’s the same with the Queensland coal. No mine, yet, but there is one coming, and when it does her wealth goes up another notch.

Interesting, isn’t it, that one person should be sitting on a $US9 billion pile of cash today (if she chose to liquidate), and $US20 billion (or more) tomorrow.

Hungry yet?

CAN 3 billion people ‘modernise’ at the same time without destroying the world economy as we know it? That is a question rarely considered, but one that will be over the course of 2011 as the global commodities crisis (GCC) deepens.

So far, reports of the GCC, a description of world commodity markets coined by WA Business News last week, have been patchy with record high prices noted in a range of raw materials such as copper, cotton, iron ore, sugar and wheat.

What hasn’t been pulled together – perhaps because most analysts only follow their specialist sectors and are not looking at the big picture – is that so many commodities are rising into record-price territory at the same time.

The short answer, especially when it comes to food, is trouble with unrest in the Middle East partly food-related as governments in that region are forced (by rising prices) to end politically popular subsidies on bread and oil.

The long answer is more trouble, with most of the world’s wars caused by disputes over access to commodities, especially land, food and fuel.

If we are heading into troubled times caused by the GCC then it is certainly worth exploring the ‘why’ part of the question. Why are commodity prices soaring?

Answers to that question range from speculators hoarding raw materials to genuine shortages of supply, and fast-growing Asia consuming more than the world can produce.

It is the appetites of 3 billion people in emerging Asia, that Bystander believes is driving the GCC, triggering alarm around the world and reports such as that from the United Nations last week that food prices hit a record high in January, the seventh consecutive monthly record.

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“Rise early. Work hard. Strike oil.”

The ‘wealth’ formula of J Paul Getty

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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