Roy Hill is gold for Rinehart

UBS has dug up hot numbers on the WA iron ore project that could propel the billionaire to world’s richest person.

Contrary to what Gina Rinehart says about Roy Hill it is not an iron ore mine, for her it’s going to be (another) gold mine and a project that restarts her march towards the title of world’s richest person.

Cash, buckets of it, will be spun off Roy Hill, eventually triggering a question that no-one has dared to ask, yet.

What on earth is she going to do with her wealth in this lifetime, or the next?

Time will provide an answer to her succession plan, if indeed there is one, but whoever inherits they’re going to be the recipient of one of the world’s greatest-ever fortunes.

Until a month ago there were doubts about whether Mrs Rinehart, already holder of the ‘Australia’s wealthiest’ title, would be able to proceed with the development of Roy Hill, forcing her to make do with cash from the Rio Tinto royalty left by her father, the late Lang Hancock, and a half-share in the Rio-run Hope Downs iron ore mine.

But, the first detailed financial analysis of Roy Hill by an outside observer has answered any questions about the business case underpinning the new mine in which Mrs Rinehart will have a 70 per cent stake, and perhaps a second source of revenue structured on that original stream of cash of the Rio royalty – a royalty of her own.

According to UBS, a big Swiss investment bank, the primary appeal of Roy Hill as a business is that it should be the third lowest-cost producer in Australia, yielding iron ore at a cost not far above the industry's two leaders, Rio Tinto and BHP Billiton, and substantially lower than Fortescue Metals Group, the company run Andrew Forrest, her rival for the title of Australia’s richest.

Both Mr Forrest and Mrs Rinehart deny any interest in the rich league tables produced by a number of organisations but what the UBS analysis of Roy Hill shows is that Mrs Rinehart is not just a country mile ahead of Mr Forrest already, she soon will be out of sight and back in contention for the title of world’s richest.

Behind the numbers

The most basic numbers about Roy Hill are known but the detail is not. The cost of the mine, railway and port is put at $10 billion (whether Australian dollars or US dollars is irrelevant given their near-parity status). The annual output said to be 55 million tonnes a year.

But, what UBS has done is look below the basic numbers to find that Roy Hill will produce iron ore at a cash cost of $30 a tonne, which, when financing, royalties and other charges are added, should see the total (all-in) cost come in at $54 a tonne.

BHP Billiton and Rio Tinto are estimated to be producing iron ore at between $40 and $45 a tonne. Fortescue is at $72/t.

Given the iron ore price at close to $120/t, that $54/t estimated all-in cost should see Roy Hill generate a gross profit of $66/t, or $3.6 billion a year at the annual output rate of 55 million tonnes a year.

Mrs Rinehart’s 70 per cent of Roy Hill entitles her to 38.5 million tonnes of ore a year, which, at a gross margin of $66/t, equates to $2.5 billion a year, which she can add to her estimated $1.8 billion a year from her 50 per cent of Hope Downs and $250 million a year from the original Roy Hill royalty.

Tax and other charges will shrink the cash that hits her bank account, but a best guess is that Mrs Rinehart will, after Roy Hill hits steady production, be the recipient of around $2.5 billion in clean cash a year.

If sold as a going concern on a 10-times multiple that $2.5 billion a year would fetch $25 billion, whereas a more likely multiple is 12 times given the underlying strength of the income stream, or around $30 billion, lifting Mrs Rinehart from 43on the Forbes list of the world’s richest people to 18.^.

This will put her just behind former New York mayor Michael Bloomberg and roughly half-way to catching the third-richest man, US investor Warren Buffet, at $62.5 billion and on the way to catching the richest, Bill Gates, at $76.7 billion.

Mrs Rinehart will object to being moved up the rich list, which is always going to be a number derived from a number of assumptions and future commodity-price moves, but she has less grounds to protest today because UBS has done some of the guesswork and revealed what could be a juicy second income stream from Roy Hill.

Cash flows

According to the bank, which uses a very conservative future iron ore price projection of $US89/t, Roy Hill will be spinning off an annual net profit after tax of $US1.4 billion a year from 2017, a number which takes into account two royalty payments.

One of the royalties, struck at a rate 7.5 per cent on the gross value of the ore will generate $369 million a year for the Western Australian Government.

The second royalty, struck at 2.5 per cent a year, is called the ‘owner’s royalty’. It will generate $123 million a year and, while the recipient is unnamed, it is likely to be Hancock Prospecting, the parent company of Mrs Rinehart’s business empire.

If the UBS profit estimate for Roy Hill is taken as an accurate estimate by qualified bankers, then 70 per cent, or $980 million, of the $1.4 billion a year goes to Mrs Rinehart, with the royalty of $123 million taking Roy Hill’s contribution to her fortune over the $1 billion-a-year mark.

For anyone interested in the detail of the Roy Hill project, there is a quality reason behind UBS’s optimistic assumptions because the ore expected to come from the mine will be both low in impurities (which can incur a price discount) and high in lump material (which earns a price premium).

The split, according to the bank, is a very high 40 per cent lump with the balance made up of lower-value fines with the average grade being 61 per cent iron, significantly better than Fortescue’s average grade of 57.6 per cent iron.

With financing in place and construction under way, Mrs Rinehart is not only on track to make Roy Hill her major profit contributor, she will soon have clear air (and cash flow) to accelerate planning for her next mine.