Rinehart Record Debt Lures Even as China Slows: Australia Credit

Global lenders are competing to offer a record debt deal for an Australian mining project to Gina Rinehart, Asia’s richest woman, betting her iron-ore deposits are rich enough to prosper even as China slows.

Rinehart’s Roy Hill Holdings Pty expects to complete financing talks this year an about A$7 billion ($6.4 billion) to help fund its mine, rail and port project. National Australia Bank Ltd. and BNP Paribas SA are helping arrange some A$3 billion of debt to back the development in the remote north of Western Australia state, said a person familiar with the matter.

Banks are betting the economics behind Rinehart’s 21-year-long ambition outweigh concern that $250 billion of planned mines will create a glut as slowing growth in China saps demand in the biggest buyer of the raw material. Bonds issued by Perth-based Fortescue Metals Ltd., Australia’s third-biggest iron-ore producer, gained in July by the most this year as the nation’s junk miners outperformed Bank of America Merrill Lynch’s U.S. High Yield Metals & Mining Index.

“It’s a particularly good project, the last of the best ones probably,” said Tim Gerrard, a Sydney-based analyst at Investec Bank Australia Ltd. “We think that it’s likely to be economic, even if it does cost A$10 billion, and as iron ore prices are expected to fall from unsustainable levels and China’s economy slows somewhat.”

Commodity Weakness

Iron ore prices are expected to fall for at least the next three years, according to Bloomberg-compiled data, and may fall even further.

Prospects for weaker demand from China, Australia’s biggest trading partner, spurred concern the South Pacific nation will struggle to cope as a record mining boom winds down. The Aussie dollar slid 8.2 percent over the past three months to 92.05 U.S. cents as of 12 p.m. in Sydney, the steepest drop among 10 major developed-market currencies.

The benchmark 10-year government bond yield was at 3.68 percent, or 111 basis points more than for similar-dated Treasuries. That premium has shrunk 41 basis points since Dec. 31 and touched a six-year low of 96 this month.

Japan, Korea

Rinehart is seeking about A$4 billion from export credit agencies, according to the person familiar with the matter, who asked not to be identified because the details are private.

Roy Hill has been talking with Japan Bank for International Cooperation, Export-Import Bank of Korea, Nippon Export and Investment Insurance, Export-Import Bank of United States and the Korea Trade Insurance Corp. since December. It hired Sumitomo Mitsui Banking Corp. to arrange the debt last year, said separate people familiar with the matter.

Rinehart, who also owns stakes in iron ore mines operated by Rio Tinto Group, in the first quarter of last year sold 30 percent of Roy Hill for A$3.2 billion to a group including South Korea’s Posco, Japan’s Marubeni Corp. and Taiwan’s China Steel Corp.

“Australia is Asia’s nearest significant source of iron ore,” Belinda Fan, a Melbourne-based partner with law firm Herbert Smith Freehills LLP, who advised the buyers on their equity investment, said by phone. “The Chinese, Japanese and Koreans are well aware of this, so they are seeking to have an ownership role in specific Australian projects to gain a degree of supply certainty for the medium term.”

Roy Hill in March awarded a A$5.9 billion contract to Samsung C&T Corp. to build an iron ore processing plant, railway line and port facilities. Qantas Airways Ltd. last month signed a three-year agreement to provide charter services, flying to Roy Hill from Perth three times a week from Aug. 13 to transport workers to the operation that is set to start production in 2015 with a capacity of 55 million tons annually.

Courtroom Battle

Commodity price gains over the past decade boosted Rinehart’s wealth to $18 billion, making her the world’s 38th richest person, according to the Bloomberg Billionaires Index. It’s a fortune built on vast iron ore and coal deposits, most of which were discovered from the 1950s to 1970s by her late father, Lang Hancock. While Roy Hill’s debt talks progress, Rinehart, 59, is also locked in a courtroom battle with two of her four children over control of a A$4 billion family trust.

Rinehart’s closest rival, Fortescue, in 2006 benefited from growing Chinese demand by spending about A$3.6 billion on a mine, port and rail operation in the Pilbara region, where Roy Hill is also located. After struggling to fund the project from local banks, it raised $2.05 billion from U.S. high-yield bond investors, the largest raising in that market at the time, according to the company’s website.

Fortescue Debt

Fortescue notes generated returns of 2.7 percent last month, Bank of America data show. Australian debt in the U.S. High Yield Metals & Mining gauge advanced 2.09 percent, compared with 2.07 percent for the index as a whole.

Fortescue’s initial operations spanned similar dimensions to the planned A$10 billion Roy Hill project, which will have 344 kilometers (214 miles) of rail road and links to Port Hedland, the world’s biggest bulk export terminal. While Fortescue’s mines started up in mid-2006 when China’s gross domestic product was powering along at an 11.5 percent annual pace, Rinehart is seeking funds after growth in the world’s second-largest economy slipped to 7.5 percent.

Price Swings

Iron ore set a three-year low of $86.70 a ton in September, with a weaker Chinese economy prompting prices to swing between gains and losses over the past year. It recovered to $133.1 as of Aug. 7. The world’s second-biggest economy used 646 million tons of steel in 2012, more than twice the rest of the Asia region combined.

“Some of the concerns the financiers would have had, which were principally with the development cost as well as perhaps the longer-term outlook for the market, they’re probably starting to tail off,” Michael Bush, head of credit research at National Australia Bank Ltd., said by phone from Melbourne. “People can understand and appreciate it’s a good quality resource in terms of the iron ore, that gives it a premium status, which gives people more confidence.”

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