Richest Woman in Asia-Pacific Buys Iron as BHP Says Era Ends

By Jasmine Ng and David Stringer

Gina Rinehart, the Asia-Pacific’s richest woman, is set to start exports in September from her new A$10 billion ($8.6 billion) iron ore mine undeterred by prices trading near five-year lows and forecast to extend losses.
“We don’t like the ore price going down, but we’re in the lower quartile” of production costs, Rinehart, chairman of Hancock Prospecting Pty, said yesterday in an interview at the Roy Hill mine in Australia’s iron-rich Pilbara region.
She was talking just hours after Andrew Mackenzie, chief executive officer of BHP Billiton Ltd. (BHP), called an end to the era of “massive expansions of iron ore.” BHP and rivals Rio Tinto Group (RIO) and Vale SA (VALE5) are flooding the global market, spurring a surplus after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil.
“I don’t think next year would be ideal to be
adding new supply,” Daniel Morgan, a Sydney-based analyst at UBS AG, said in a Nov. 17. phone interview. “The market is pretty well supplied for the next few years.”
BHP stock lost 4.7 percent in Sydney this week for the biggest weekly loss since March, while Rio shares fell 6.1 percent. Fortescue Metals Group (FMG) Ltd., the country’s third-biggest shipper, retreated 54 percent this year.

Photographer: Philip Gostelow/Bloomberg

Billionaire Gina Rinehart, chairman of Hancock Prospecting Pty, stands for a photograph... Read More

The largest producers are targeting record shipments, betting the increase will offset the plunging prices and force less competitive mines to close, including production in China, the largest buyer of seaborne supplies.

‘Last People Standing’

“Our view is that there’s a sustainable long-term iron ore demand,” Barry Fitzgerald, CEO of Roy Hill Holdings Pty, told reporters. “The market economics will always demonstrate ultimately the high-cost producers will need to exit the market and therefore leave us among the other low-cost producers as one of the last people standing.”
Rinehart, who also owns stakes in iron ore mines operated by Rio Tinto, sold 30 percent of Roy Hill to a group including South Korea’s Posco, Japan’s Marubeni Corp. and Taiwan’s China Steel Corp. The overseas partners will take a share of production from Roy Hill, according to the company website.
“It’s probably been a long-held goal to get something she controls into the market,” UBS’s Morgan said. “She’s obviously got a high exposure to the iron ore market through her other business interests. This is the first time she gets to control an asset.”

Roy Hill

More than 2 million metric tons of iron ore has already been stockpiled at Roy Hill, Rinehart earlier told reporters. Project construction is 67 percent complete, Roy Hill Holdings said in a statement.

Photographer: Philip Gostelow/Bloomberg

An ore crushing facility stands under construction at Hancock Prospecting Pty's Roy... Read More

“Given we’re already an aggressively scheduled, fast-scheduled project, major project, really complicated project, and to be ahead of schedule has been fantastic,” said Rinehart, whose net worth is valued at $14.6 billion, according to the Bloomberg Billionaires Index.
While sticking with iron ore, Rinehart’s Hancock Prospecting is also diversifying. Unit Hope Dairies Ltd. last week announced a A$500 million expansion into infant formula, with plans for a farm and dairy herd in Queensland, with shipments to be sent to China.
BHP Billiton, which last approved spending on an iron ore expansion in 2011, is shifting investment into copper and petroleum, CEO Mackenzie told reporters yesterday after a shareholder meeting in Adelaide, South Australia.

Bear Market

Ore with 62 percent content delivered to Qingdao in China rose 1.1 percent to $70.97 a dry ton yesterday, data by Metal Bulletin Ltd. showed. The steel-making ingredient retreated 47 percent this year after entering a bear market in March.
Prices will average $65 a ton next year, dropping into the $50s in the third quarter, as global supply increases and demand remains weak, Citigroup Inc. said in a Nov. 11 report.
Roy Hill’s break-even cost is at $56 in terms of ore landed in China with 62 percent content, UBS said in a Sept. 12 report, with figures confirmed by Morgan on Nov. 17. Rio’s break-even cost is $45, BHP’s is $49 and Vale is at $67, according to UBS.
Marubeni isn’t concerned about a writedown on Roy Hill as the mine has a cash cost that’s “well below $50 a ton” in Australia, Chief Financial Officer Yukihiko Matsumura said on Nov. 6. China Steel, which holds a 2.5 percent stake, doesn’t have any plan to change that as of now, Executive Vice President Lin Horng-nan said on Nov. 18. Posco had no immediate comment.
The slowdown hasn’t discouraged Vale, the biggest exporter, which is investing $37 billion on iron ore mining and logistics projects, seeking to boost its output capacity to about 450 million tons by 2018.

Vale’s View

In the long term, the market won’t be oversupplied all the time, Claudio Alves, global director of ferrous marketing and sales at Vale, said Nov. 7.
The global seaborne market needs to absorb a surplus of about 110 million tons next year, almost double the 60 million tons in 2014, according to Goldman Sachs Group Inc. The bank declared the “end of the Iron Age” in a September report as a Chinese-led demand surge over the past decade that had brought record profits for producers came to an end.
“The decline next year will be driven mainly by new supply, largely coming from the majors in Western Australia,” Gerard Burg, senior Asia economist at National Australia Bank Ltd. in Melbourne, said by phone on Nov. 17. “Given the lower cost base of those production, we expect that trend to continue.”