Billionaire Rinehart Builds Railways as Iron Ore Plunges
Gina Rinehart, Asia’s richest woman, built her fortune by heeding her own counsel. Now she’s testing that acumen by building her own iron ore railroad in Australia’s remote north -- just as prices enter a bear market.
Samsung C&T Corp. (000830), South Korea’s second-largest builder, has started initial work after winning a A$5.6 billion ($5.4 billion) contract in March to build the railroad, plant and port for Rinehart’s Roy Hill mine. The 340-kilometer (211-mile) line to Port Hedland, the world’s biggest bulk terminal, will run parallel to two other rail networks and one planned route.
While Rinehart could cut costs by sharing infrastructure with competitors, according to UBS AG, she’s proceeding with her own railroad after passing on a potential investment accord with one of them: rival iron ore mining billionaire Andrew Forrest. The 59-year-old heiress, the world’s 35th-richest person, is seeking funding for her project, including the line, as costs peak and prices drop amid forecasts of a global supply glut.
“She’s taking on a lot of risk in terms of market outlook and the amount of capital that she’d going to need to build it,” Tom Price, a Sydney-based commodity analyst at UBS, said by phone. “It just seems like a very expensive path.”
Rinehart’s Hancock Prospecting Pty, which owns 70 percent of the A$10 billion Roy Hill project, plans to ship 55 million metric tons annually starting in 2015. Her venture partners include Posco (005490), Asia’s third-biggest steelmaker by output, and Japan’s Marubeni Corp. (8002)
Iron ore has plunged 27 percent since Feb. 20, when it reached a 16-month high of $158.90, meeting the common definition of a bear market. The world’s biggest iron-ore producers are planning $250 billion of new mines, threatening to deepen a price slump for the commodity already forecast to drop for at least the next three years.
China, the biggest iron ore importer, won’t carry out a significant stimulus policy under the new government, Baosteel Group Corp.’s Chairman Xu Lejiang said yesterday in Shanghai. Global iron ore supply, driven by capacity expansions, will outpace future steel demand in China, which has seen annual steel output growth drop to less than 5 percent from 20 percent mid last decade, said Xu, who heads the nation’s third-largest steelmaker by output.
“Posco’s investment is obviously based on its long-term drive to improve its raw-material self-sufficiency,” Bang Min Jin, a metals analyst with Seoul-based HI Investment & Securities Co., said by phone. “In the short term, the project’s profitability appears to be uncertain because of concerns about a supply glut.”
Shin Soo Cheol, managing director at Posco Australia Pty, wasn’t available for a comment.
Hancock had studied a proposal by Forrest’s Fortescue Metals Group Ltd. (FMG), whose Christmas Creek mine is about 50 kilometers from Roy Hill, to sell stakes in its rails and ports. The company concluded it would rather seek to control its own assets, Barry Fitzgerald, chief executive officer of Hancock unit Roy Hill Holdings Pty, said in a March interview in Perth. It was also open to selling more equity stakes, he said.
“When the opportunity presented itself to evaluate the new Fortescue option, the conclusion soon firmly reinforced the benefits of the original Roy Hill business model,” Perth-based Roy Hill said June 4 in an e-mailed statement. “The integrated handling and control of the rail infrastructure ensures maximum operations efficiency is secured, costs minimized and risks managed.”
A 49 percent stake in the assets of Fortescue may be worth as much as $4 billion, according to a December estimate by CIMB Securities (Australia) Ltd. Talks are progressing with other groups and may end by the end of June, Fortescue said in April.
An earlier proposal by Fortescue to extend its line, including a spur to Roy Hill, could have saved Rinehart more than A$1 billion, Western Australia Today reported in September, citing a source familiar with the proposal. Fortescue declined to comment on any talks with Hancock Prospecting or Roy Hill.
“Collaboration in any form would be good and will be value enhancing,” Prasad Patkar, who helps manage about A$1 billion at Platypus Asset Management Ltd. in Sydney, said by phone. “I’m not optimistic that it’ll happen this time around.”
There’s little history of co-operation among iron ore developers and producers in Australia’s vast Pilbara region. BHP Billiton Ltd. (BHP), the world’s biggest mining company, and Rio Tinto Group (RIO) have guarded their networks from other users, arguing that other companies would disrupt their operations. Perth-based Fortescue unsuccessfully battled for nearly a decade to gain access to their rail lines.
To be sure, it would be too much of a “squeeze” for Rinehart to use Fortescue’s line, so it makes sense for her to build her own rail and seek out customers from rival producers, Deutsche Bank AG analyst Paul Young said in an interview.
“Ultimately it’s critically important that you have certainty of your ability of getting your product to port and ship it,” Nigel Lake, co-chief executive officer of Sydney-based corporate advisory firm Pottinger, said by phone. “Hence, controlling that supply chain is very attractive. More than anything these projects are about logistics.”
Rinehart’s Roy Hill rail may cost about A$2.7 billion, according to Sydney-based Deutsche Bank analyst Cameron McDonald, based on the bank’s estimate for a similar 340-kilometer line being studied by a group led by haulage company Aurizon Holdings Ltd. (AZJ) According to LIG Investment & Securities Co., the rail component of the Samsung contract may be worth about A$1.8 billion.
Fortescue is spending $2.4 billion, according to the company, constructing new and duplicating 250 kilometers of rail, four bridges and two rail loops at the port to help expand annual output to 155 million tons by the end of the year.
One initial winner is Samsung C&T, which has risen 4.5 percent in Seoul trading from a five-month low on April 26. The contract will help boost sales by about 1 trillion won ($890 million) this year and about 2.5 trillion won a year over the next two years, according to LIG Investment.
“Samsung C&T has been seeking to enter the mining sector as it’s one of the company’s three priorities in the long term,” Chae Sang Wook, a construction analyst at LIG Investment who has Samsung C&T as his top sector pick, said by phone on May 15. “The order will help increase the company’s sales and operating profit.”
“The Roy Hill project offers Samsung C&T a big opportunity for growth,” the Seoul-based builder said in an e-mail.
Rinehart would also benefit from partnering with Aurizon and Atlas Iron Ltd. (AGO), which is studying the fourth railroad, according to a Macquarie Bank Ltd. report last year. Iron ore producer Atlas had held talks with Hancock for an infrastructure accord, the Australian newspaper reported last June, citing Atlas Chairman David Flanagan.
“There are ongoing talks with current and potential future infrastructure providers,” Paul Armstrong, an outside spokesman for Perth-based Atlas, said by phone, declining to specify whether the talks included Hancock.
The Roy Hill project is being assessed by institutions against the long-term price of iron ore, Fitzgerald said in March. BHP Billiton forecasts that steel demand in China will keep rising until at least 2025.
Hancock is in talks with commercial banks and export credit agencies to raise A$7 billion in debt to fund Roy Hill and met with export credit agencies in December. It plans to reach a “debt milestone” by mid-2013 and then complete funding at the end of the year, Fitzgerald said in March.
“Which risk is worse -- to be beholden to someone else or to the market?”, said UBS’s Price. “For big personalities in this industry, they always seem to go for the market option.”