Emerging iron ore producers Atlas Iron and Gindalbie Metals are treading different paths to becoming leading independent miners in an industry dominated by multinationals.
Both are poised on the verge of successfully making the transition to production, but remain keenly aware of the pitfalls created by the planned resource super profits tax, especially for those companies following in their footsteps.
ATLAS Iron boss David Flanagan does not readily accept the oft-proffered tag of ‘the next FMG’ sometimes attributed to his rapidly growing Pilbara iron ore producer.
For while he admits to dreaming of his own iron ore empire, his plan of attack is fundamentally different to that of Fortescue Metals Group.
“The Fortescue story is a very successful one. They’ve employed a lot of people and invested a lot of money in the community ... partly because they’ve had access to capital but also because there is so much undiscovered wealth in the Pilbara,” Mr Flanagan says at the site of Atlas’ first mine, Pardoo, near Port Hedland.
“Our business model is different. Over time, we do see ourselves becoming a $5 billion or $10 billion business. We want to become a great Australian company but our model is not one where we are seeking to invest multi-billions of dollars in infrastructure.”
Pardoo is the embodiment of Mr Flanagan’s dollar-conscious ethos. Lying just 75 kilometres east of Port Hedland on the route of BHP Billiton’s under-used Goldsworthy railway, Pardoo was first pegged as a gold play before Atlas recognised its iron ore potential in early 2005.
Since then, Atlas has spent a mere $20 million or so to bring it into production, shipping first ore in late 2008. Production is now being ramped up and should treble to 3 million tonnes per annum by the end of the year.
Last week, it also started production at its second mine at Wodgina, 100km south of Port Hedland, where it also plans to produce around 3mtpa for a miserly $12 million.
The secret to that is its infrastructure-sharing deal with Talison Minerals giving it full use of Talison’s extensive camp and processing facilities for the mothballed Wodgina tantalum mine.
Two more mines planned nearby at Abydos and Mt Webber will double output again to 12mtpa by 2012.
This expansion will be more costly at around $170 million to include construction of the Turner River processing hub, incorporating larger crushing and screening equipment, on flatter ground nearby.
At that point, Atlas will still have invested only a little over $200 million in mine development to produce a quarter of the output of Fortescue for just 5 per cent of Fortescue’s $4 billion investment.
Minimising cost
The key difference is that Atlas has not had to invest billions in port and rail infrastructure. The modest scale of its projects and proximity to Port Hedland have allowed it to truck its ore to the port, where a new state government-backed $250 million multi-user bulk commodity berth will also open in mid-September.
Though trucking is less efficient than rail for high-volume long-haul mining, it has kept Atlas’ production costs at the bottom end of the curve at around $40-45 per tonne. When capital and financing costs of just $3/t are included, Atlas is in the bottom quartile, given a comparative figure of up to $100/t for many other producers.
“That’s what made the institutions start to sit up and take notice,” Mr Flanagan says, adding that Wodgina and Pardoo should together “throw off $20 million to $30 million in free cash every month by next year”.
Still, Atlas remains keen to access existing rail infrastructure, given BHP’s Goldworthy line almost crosses the Pardoo tenements, and Wodgina and Abydos both lie near main lines operated by Fortescue and BHP. Rail access could deliver both further savings and allow greater expansion.
It is also vital for development of Atlas’ $2.7 billion Ridley magnetite project at Pardoo, for which it is currently in talks with three prospective development partners.
RSPT risks
To date, Atlas has been able to fund its plans entirely through conventional equity financing, raising about $280 million on international equity markets since April 2008 – all without incurring any debt.
Hence Mr Flanagan’s vocal opposition to the federal government’s planned resource super profits tax and its impact on the availability of both equity and debt financing.
“When you’ve got uncertainty around equity markets, there’s less equity available,” Mr Flanagan says. “And if you are going to get less net profit (with an RSPT), it means you can borrow less money.
“So it is something we are concerned about. We don’t need the RSPT and it’s not good for Australia.”
The mere announcement of the proposed tax initially threatened an ultimately successful $63 million raising by Atlas in May, pushing its share price 40 cents below the $2.49 raising price while the company was still waiting for cheques to come in.
It has also affected Atlas’ negotiations with the three groups looking to buy a controlling stake in the Ridley project. According to Mr Flanagan, one group has already argued the price must drop while the others now want Atlas to shoulder more of the project risk to complete a deal.
Meanwhile the ongoing uncertainty poses an even bigger risk to the planned $2 billion South West Creek 50mtpa multi-user iron ore berth at Port Hedland. The berth is vital to Atlas’ long-term growth as well as the production plans of fellow newcomers Brockman Resources and Ferraus.
But a hiccup in financing any one of them could delay the port development indefinitely.
“We’ve all got very good projects and are advancing them very well,” Mr Flanagan says. “But a project like that (South West Creek), which requires a lot of money ... is only going to be as bankable as the weakest of those projects.”
China still the lifeline
About 1,000km to the south, at Gindalbie Metals’ $2 billion Karara magnetite joint venture with Chinese steel giant AnSteel, Gindalbie managing director Garret Dixon knows how lucky he is to have effectively banked the project long before ousted prime minister Kevin Rudd announced his tax plans in May.
Gindalbie and AnSteel last week formally signed a $US1.2 billion project loan for Karara with China Development Bank, guaranteeing all debt funding needed to complete the 10mtpa stage one development.
That was followed by shareholder approval of a $200 million capital raising to provide the last portion of Gindalbie’s 50 per cent share of equity funding for the project.
Usual construction risk is now the main obstacle between Gindalbie starting small-scale hematite iron production next year, followed by full scale magnetite production in 2012.
The key to that has been the involvement of AnSteel, which will buy all Karara output provided an avenue for Chinese bank funding. The effective interest rate is under 3 per cent, less than half the cost of typical debt funding even if it were available.
“There’s no stopping the Karara project,” Mr Dixon says. “(But) for a project like this, you certainly need funds from overseas. We couldn’t raise the funds for this; we couldn’t underpin the debt. So for small companies like we are, we need overseas finance.
“And while there is uncertainty out there it will make things very difficult for those things to happen.”
Like Atlas, Gindalbie expects its production costs to total around $42/t, with the scale of the 2.5 billion tonne resource offsetting the additional cost of having to upgrade its lower grade magnetite ore.
The higher grade and purity of Karara’s beneficiated final product also means Gindalbie will extract an extra 10-20 per cent price premium for its production.
Furthermore, the Karara partners have opted to invest in key site infrastructure, including an 85km heavy duty rail spur to Morawa, needed to rapidly treble output to over 30mtpa once the Oakajee deepwater port is operational in 2014.
Until then, it will ship over 1mt-2mt a year of hematite and 8mtpa of magnetite concentrate through the existing port at Geraldton.
But while Karara’s future seems assured, Mr Dixon feels for those still trying to fund such projects while the tax issue remains unresolved.
“I’d hate to be doing that now,” he says.
• The reporter travelled to the Pilbara and Mid West as a guest of Atlas Iron and Gindalbie Metals.
