Iron Ore Heiress Cashes in on Coal, Dodging 30% Decline

Billionaire Gina Rinehart
Gina Rinehart, chairwoman of Hancock Prospecting Pty. Photographer: Ron D'Raine/Bloomberg

Iron ore magnate Gina Rinehart, Asia’s richest woman, is also no slouch when it comes to making money from coal, selling most of her assets for $1.26 billion before the worst price slump for the fuel in four years.

Rinehart, 58, with an estimated wealth of $18.8 billion, according to Bloomberg’s Billionaires Index, last year sold thermal coal assets in Australia to Indian billionaire GV Krishna Reddy’s GVK Group, a builder of highways, airports and power plants. Since the deal in September, coal prices have slumped almost 30 percent, just as GVK seeks funding to develop $10 billion of mines, port and rail.

“It’s a good sale for her, with the way things stand now, of course it’s a great sale,” Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney, said by phone, referring to Rinehart’s deal. “At these prices, projects are genuinely marginal. If you were signing off on projects, the easiest decision would be to defer.”

For Rinehart, whose father Lang Hancock discovered the iron ore mines that today supply Asia’s steel industry, the coal deal has freed her up to focus on developing her Roy Hill iron ore mine in Western Australia with partners including South Korea’s Posco. Reddy, 75, the self-made son of a farmer, is looking to sell stakes in the coal projects as well as raise $7 billion in debt as the euro crisis has made borrowing more expensive and global mine building costs have soared.

Soaring Fortunes

Rinehart’s fortune soared as China’s voracious demand for raw materials drove up the value of the assets she inherited almost 20 years ago. Hancock discovered mines that made Australia the world’s biggest iron ore exporter, while Rinehart, through her company Hancock Prospecting Pty, has forged further lucrative joint venture agreements with Rio Tinto Group, the world’s second-biggest iron ore shipper, for operations in Western Australia’s Pilbara region.

Rinehart and Reddy, along with fellow billionaire Gautam Adani and Australian mining magnate Clive Palmer are all seeking to develop coal projects in Queensland state’s Galilee basin to supply long-term forecast demand in China and India, the two fastest-growing major economies. Slowing growth in these nations, along with increased exports from the U.S., drove coal prices down 18 percent during the second quarter, the most since the last three months of 2008 when the global financial crisis roiled markets.

“It’s an extraordinarily large correction for a market that’s famous for being very stable year-on-year,” Tom Price, a Sydney-based commodity analyst for UBS AG said by phone. He expects that high inventories and U.S. exports will continue to drag on prices. UBS on July 9 cut its thermal coal forecast by

4.5 percent to $105 a ton, and expects prices to average at $98 a ton during 2014. Benchmark thermal coal traded at $89.65 a ton on Aug 2.

Great Timing

GVK agreed in September to pay $1.26 billion for the 79 percent stake in the Alpha and Alpha West projects of Rinehart’s Hancock Prospecting Pty, all of Kevin’s Corner project as well as the 495-kilometer (308-mile) rail line and the port project at Abbot Point. Rinehart retains a 21 percent stake in Alpha. Reddy said last month in an interview that he expects to tie up the borrowings of about $7 billion by December to fund the development, six months later than an initial time frame.

“She still holds a stake in that and she’s relying on her partners to be able to add value,” Mike Elliott, global mining sector leader for Ernst & Young LLP, said in an interview. “If you look at it as it is today, you’d say she exited at a great time.”

Syndicated lending

Miners including BHP Billiton Ltd., the world’s biggest, and Rio Tinto are reassessing spending plans as prices drop, on growth concern in Europe and China, the biggest metals user. Global banks scaled back cross-border lending to companies, governments and each other at the fastest rate since 2008 in the final quarter of last year, the Bank for International Settlements said in June. In Australia, syndicated lending dropped 38 percent to $32.4 billion this year compared with the same period of 2011, according to data compiled by Bloomberg.

“It’s clearly harder today than it was a year ago” to develop multi-billion dollar resource projects, Robin Miller, an executive director at Industry Funds Management Pty who oversees debt investments of about A$10.5 billion, said by phone. “The increased cost of money is biting due to the recognition of the European sovereign debt crisis in late 2011 and its interaction with banking. That’s the new reality whereas a year ago it was all still boom time.”

Fairfax, Ten

Rinehart hasn’t been untouched by the decline in commodity prices. The value of her assets, which ranks her as the 30th richest person globally, has declined by $1.4 billion this year, according to the Bloomberg Billionaires Index. And her deals outside the mining sector have yet to make money.

Shares in Fairfax Media Ltd., Australia’s second-largest media company in which Rinehart is the biggest shareholder with a 15 percent stake, have slumped 37 percent in the past 12 months. The market value of Ten Network Holdings Ltd., Australia’s third-largest TV broadcaster, where Hancock owns a 10 percent stake, has plunged 50 percent in the past year. Rinehart became a substantial holder of Fairfax stock on Jan. 3, while buying her stake in Ten in November 2010, according to filings. Fairfax edged almost 1 percent higher to 52 Australian cents at the close today in Sydney; Ten climbed 4.6 percent.

Hancock receives a 1.25 percent royalty in perpetuity from iron ore sales from the Hamersley Iron mine, while the Hope Downs operation, a 50/50 joint venture with Rio Tinto named after Rinehart’s mother, produced 32 million metric tons last year, according to Rio’s annual report. Both operations are located in Australia’s Pilbara region and operated by Rio.

India Demand

While giving up control of the Galilee coal assets, Rinehart only sold 30 percent of the Roy Hill iron ore project. Her Hancock Prospecting, seeking as much as A$7 billion ($7.2 billion) to finance the ore project, hired Sumitomo Mitsui Banking Corp. to help co-ordinate the debt from export credit agencies, two people familiar with the matter said in April. She’s already secured the backing of Japan’s Marubeni Corp., which in March agreed to pay $1.5 billion for a 12.5 percent stake in Roy Hill, with STX Corp. and Taiwan’s China Steel Corp. also buying stakes along with Posco, Asia’s third-biggest steel mill.

In the long term, Rinehart’s 21 percent stake in the Alpha project may yet produce the kind of royalty flow she gets from iron ore, and without large capital expenses. India’s worst ever power crisis in 60 years, which left more than 640 million people without electricity, demonstrates the nation’s acute need for power. India’s demand for seaborne thermal coal may rise to 400 million tons by 2030 from 80 million last year, U.K.-based consultant WoodMackenzie Ltd. said in a report March 14.

“There’s still going to be a desperate need for coal in India and in China over a period of time,” said Platypus Management’s Patkar. “You have to take a long-term view and hopefully these projects are robust at prices that are far lower than today’s prevailing spot price.”

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