Pilbara resets as iron ore majors shift spending focus

What’s next for the iron ore sector, as the final two ‘mega’ iron ore projects approach completion in the Pilbara?

There has been a consistent message from the big three miners in the Pilbara this year, despite the numerous adjustments they have been forced to make to deal with persistently low prices.

First it was BHP Billiton which announced completion of the last of its major expansion projects, with the tie-in of its new ship loaders in January.

Then Fortescue Metals Group announced it had completed all expansion capital expenditure, with the commissioning of its fifth shipping berth at Port Hedland.

Soon after, Rio Tinto, which has invested $US28 billion ($39 billion) in its Pilbara operations over the past eight years, said it had completed the key aspects of its rail and port infrastructure upgrade.

The big three haven’t stopped spending entirely – as discussed below – with plans to spend about $3 billion on what they call ‘sustaining capital expenditure’.

That will be on top of continuing spending by two other ‘mega’ iron ore projects in the Pilbara.

Hancock Prospecting is due to make the first shipment from its $10 billion Roy Hill project in coming weeks, but is hedging on the precise timing after failing to hit its own target.

Roy Hill Holdings chief executive Barry Fitzgerald told a Mining Club lunch in Perth last week there were 4,300 contractors working on the project, which indicates there is still a way to go.

Also under construction is the China-backed Sino Iron project, which is believed to have cost significantly more than $10 billion to develop.

After a tortuous eight years since the project was launched, punctuated by technical problems, cost blowouts and legal disputes, its backers at Chinese company CITIC Ltd are starting to sound relatively positive.

Two production lines are in operation and ramping up capacity, with more than 5 million tonnes of magnetite concentrate shipped to Citic and other steel mills in China.

The construction of line three has been completed and load commissioning recently commenced, line four is due to enter commissioning by the end of the year, with lines five and six to follow next year.

“We’re making good progress,” chairman Chang Zhenming said in his latest update.

“Construction and installation of the remaining four lines is progressing well.”

The construction workforce peaked at more than 1,200 contractors this year, but in an encouraging sign, that number is now reducing.

The project is run by subsidiary CITIC Pacific Mining, which is directly managing construction after earlier difficult experiences with lead contractors.

CPM’s corporate affairs manager Rob Newton said the company had learned a lot from past experience.

“With each line we build, the process becomes that little bit quicker, smoother and more efficient,” Mr Newton said.

Sino Iron is one of two big magnetite projects to have been developed in Western Australia, following the Karara Mining development in the Mid West.

Both have been backed by Chinese groups – CITIC and Ansteel respectively – which favour magnetite concentrate with its high iron content as feedstock in their mills. After shipping its first magnetite concentrate through Geraldton in 2013, the Karara project has gradually improved its performance.

Production of magnetite grew 53 per cent to 5.86 million tonnes in the year to June 2015.

The plant achieved design nameplate capacity in the month of July, according to local partner Gindalbie Metals.

But like iron ore producers in the Pilbara, Karara is focused on cutting costs to try and generate decent returns on the big investment in the Karara plant.

Supply growth

The prospect of more iron ore supply coming on to the market, mainly from Australia and Brazil, has led most analysts to predict continued weakness in iron ore prices.

Roy Hill will be one of the biggest contributors to new supply, with the project aiming for annual shipments of 55mt per year when it reaches full capacity.

However, Hancock Prospecting executive director Tad Watroba believes many pundits have overstated the company’s impact.

“Close to 90 per cent of Roy Hill’s product is already under long-term contract, so very little ore will actually enter the spot iron ore market,” Mr Watroba said.

“The fact is, Roy Hill was not in the market when the iron ore price crashed last year or continued to drop this year, and won’t be shipping 55mtpa next year as it continues to ramp-up production.”

Rio and BHP will be adding more tonnage to the market as they seek to maximise production from their existing infrastructure, but they are doing so at a measured pace.

The deferral of BHP’s inner harbour de-bottlenecking project in April was a clear indication of the new approach.

“Further growth in supply chain capacity to 270mtpa is expected to be achieved without the need for additional fixed plant investment,” the company said at the time.

“The potential of our installed infrastructure continues to exceed expectations and as a result we are deferring the inner harbour de-bottlenecking project.

“While this will lead to a slower path to system capacity of 290mtpa it will come at a lower capital cost.”

BHP is, nonetheless, continuing to make substantial investments in its Pilbara iron ore operations.

In particular, it is installing a new primary crusher and additional conveying capacity at its Jimblebar mine, and is building a new tug harbour at Port Hedland.

These initiatives fall under the banner of sustaining capital expenditure, which BHP says will be about $US5 per tonne.

With forecast production of 270mt in the current financial year, that equates to a total spend of $US1.35 billion, or $A1.91 billion.

Rio Tinto has also continued to invest in its Pilbara operations.

It completed 40mt pa of ‘brownfields’ mine expansions this year, at a capital cost of about $9/t.

Rio is also expected to make a final investment decision on its Silvergrass mine next year.

With an estimated cost of $1 billion, the Silvergrass mine is seen as a necessary step if Rio is to achieve its goal of lifting production to 360mtpa in the Pilbara.

That is up from expected production of 330mt this year.

Fortescue is tipping production this year of 165mt, with sustaining capital expenditure (excluding exploration) of $US2 per tonne.

That equates to spending of $US330 million in the current financial year.

Flexibility

Just as the big producers have rapidly scaled down their capital spending in the Pilbara, they will be equally able to rapidly scale up if there are improved opportunities in the iron ore market.

That prospect poses a big challenge for the proponents of new iron ore projects (see table above).

The biggest of these is the West Pilbara iron ore project, backed by a consortium that includes Chinese steelmaker Baosteel and local infrastructure company Aurizon.

This project involves development of new rail line and transhipment port, to be fed by new mines.

In 2012, the overall project was estimated to cost $7.4 billion.

The infrastructure component was equivalent to $6 billion in today’s dollars, according to Aurizon.

Earlier this year, Aurizon said it has been able to reduce the capex by 25 per cent while lifting throughput by 33 per cent.

It is continuing to work on the project, but has pushed back a final investment decision to late in calendar year 2016.