07/11/2013 - 13:50

Rinehart’s nice little earner

07/11/2013 - 13:50

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It will probably take Gina Rinehart a few years to catch Bill Gates in the race to be the world’s richest person, but it is easy to see how she might overhaul the Microsoft founder’s swag of $75 billion.

Rinehart’s nice little earner
ADDING UP: Gina Rinehart's iron ore plays in WA could substantially add many billions to her pile.

It will probably take Gina Rinehart a few years to catch Bill Gates in the race to be the world’s richest person, but it is easy to see how she might overhaul the Microsoft founder’s swag of $75 billion.

The twin keys will be the price of iron ore and the speed at which Mrs Rinehart can bring into production a series of mines in the design phase of the company she controls, Hancock Prospecting.

In the current pecking order, Mrs Rinehart is a long way behind Mr Gates and the $75 billion value put on him by Forbes magazine, the $61.5 billion for investment guru Warren Buffett, and the $43 billion for software entrepreneur Larry Ellison.

According to the local rich list compiled by BRW magazine, Mrs Rinehart is worth “just” $22.02 billion, while a list published by The West Australian newspaper values her fortune at $14.1 billion – though why either publication bothers with guessing to a first or second number after the decimal point is strange.

Consider a few possibilities in how Ms Rinehart might be valued.

At the low end of the spectrum is the net profit contained in the annual report of Hancock Prospecting, which was said to be $490 million, down 40 per cent on last financial year as a result of lower iron ore prices and tax provisions.

Using a 12-times multiple on that net profit, a reasonable number in the current economic climate, Hancock Prospecting is theoretically worth about $6 billion; which is obviously too low, but the number you get using the annual profit as a valuation tool.

A more interesting technique is to look at her two primary income streams – royalty payments from the Hamersley Iron (Rio Tinto) agreement  and profit share from the Hope Downs mine operated by Rio Tinto.

Hamersley’s gross revenue in the six months to June 30 was $8.7 billion, which indicates $17.4 billion for a full year. Of that, 2.5 per cent flows to Mrs Rinehart and the Wright family as a royalty – which is roughly $435 million, or around $217 million to each family.

A pure long-life cash stream of $217 million would be saleable today at a multiple of somewhere between 12 and 20 times, making it worth between $2.6 billion and $4.3 billion.

The royalty, however, is chicken feed to Mrs Rinehart. The real wealth comes from the Hope Downs mine, which is being expanded to a production target of 45 million tonnes from next year with half of that (22.5mt) her entitlement.

At a current iron ore price of around $US130 a tonne that 22.5mt will generate around $US2.9 billion in revenue.

The profit on that $3 billion of iron ore revenue is somewhere between 40 per cent or 66 per cent, which are the margins of Hamersley’s pre-tax and net profit.

At 40 per cent, Mrs Rinehart’s Hope Downs profit is $1.2 billion. At 66 per cent it is $2 billion, and using the 12-times multiple values her stake in the mine at between $14 billion and $24 billion.

Those values, however, are just a starting point, because if she successfully develops the Roy Hill mine with its targeted output of 55mt she is entitled to 70 per cent of that output (38.5mt), which at today’s iron ore price equates to an additional revenue stream of around $5 billion with somewhere between 40 per cent ($2 billion) and 66 per cent ($3.3 billion) sticking as profit.

When the royalty, Hope Downs, and notional Roy Hill assets are added it can be demonstrated that Mrs Rinehart will be enjoying annual profits of somewhere around $5 billion, saleable tomorrow on a 12-times multiple, which values her at $60 billion.

In time, Mrs Rinehart could well make a claim for the title of world’s richest person, though whether the title would bring great happiness is another subject.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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