Juniors await iron ore express

Gina Rinehart, Australia’s richest person, is a key player in a potential industry-changing process that could unlock value trapped inside a cluster of small Western Australian iron ore companies lacking access to railways, ports and customers.

The Roy Hill rail and port system being built by a consortium she leads has the capacity to carry ore owned by other miners in deposits close to the rail route linking Roy Hill in the eastern Pilbara region with Port Hedland.

Atlas Iron and Brockman Mining are two possible beneficiaries if they can negotiate access to the Roy Hill rail, not that such an arrangement has been easy in the past in WA’s tightly controlled iron ore industry where railways and ports are mainly private assets.

However, if Atlas and Brockman can strike an acceptable haulage price with Rinehart then other potential mine developers will be encouraged to reassess the prospect of getting their currently marooned iron ore to market.

The Roy Hill railway is just one of the emerging game-changers in the WA iron ore industry, where two other rail and port systems are being talked up at an international political level. The systems have enormous implications for a large number of ASX-listed miners, including Gindalbie Metals, Mt Gibson Mining and Aquila Resources – to mention just three.

What has changed?

Recent events in the complex WA rail/port tangle include:

• Investment bank UBS suggesting in a research paper that Rinehart and partners in the Roy Hill project are considering third-party access to their rail system, with Brockman and Atlas top of the contenders list thanks to having allocated capacity at Port Hedland. If a deal is struck, Roy Hill will benefit from an additional income stream while the small miners would be able to develop otherwise stranded ore deposits.
• Padbury Mining putting Oakajee back in the headlines by claiming it has access to $6 billion in fresh equity to fund the rail and port system – a claim that is yet to be backed up with essential facts, such as the identity of the capital provider.
• Talks in Beijing between WA Premier, Colin Barnett, and the chairman of Citic Pacific, Zhang Zhenming, which led to the big Chinese company being named as the latest preferred developer of Oakajee. This was a surprise given Citic’s struggle to develop the Sino Iron project in the Pilbara, where cost blow-outs and completion delays have hampered what was to have been a showpiece of Chinese industrial capacity in Australia.
• Meetings in Shanghai between Premier Barnett and the chairman of Baosteel, He Wenbo, aimed at accelerating the Anketell project, which also is expected to win final agreement soon over Aboriginal land access.

Rinehart’s decision on third-party access to the Roy Hill rail system will be the first step in the potential change process.

A decision on Oakajee, a port and rail system in the Murchison (or mid-west) region will be next, and while it has failed previously to clear financial and ownership hurdles, it is back on the agenda after the surprise naming of Citic Pacific as a preferred developer.

Anketell, a Pilbara port and rail system proposed by Aquila Resources with Baosteel, could be a third event in the opening of the iron ore industry to more small producers.

A fourth possible transport solution is an independent Pilbara rail system servicing small miners in the north Pilbara and along its route to Port Hedland.

There is a risk that the renewed optimism about solutions emerging for isolated iron ore deposits owned by small resource companies will fade when talks reach the financial and practical stages, as they have in the past.

Opportunity for forgotten stocks

But the hope this time is that with the WA iron ore industry, which is Australia’s biggest single source of export income, approaching a critical mass in terms of infrastructure that privately owned assets finally will be opened up to outside customers, at a price.

If that’s the case, and if the iron ore price stays high (which are two significant issues for investors to consider), then opportunities will blossom across a family of small iron ore stocks that largely have been forgotten after failing to launch in the resources boom when the iron ore price was around $US160 a tonne.

As Adam Carr explains today, the iron ore price– at $US113 a tonne – has stabilised in recent months, and with the global industry adjusting supplies, the future looks bright.

That sky-high price made it possible for some small mines to develop using expensive road-haul solutions because rail was not available, or because private rail owners would not provide access, arguing that they operated a closed system that was a single mine-to-port process.

With the iron ore price lower, and at times threatening to drop below $US100/t, a transport solution that is cheaper than road-haul is becoming important for the survival of high-cost mines.

In theory, that makes the start-up of the Roy Hill project towards the end of next year, and the latest proposals to dust off the Oakajee and Anketell projects, events that could reinvigorate an industry which has always had significant transport barriers to entry.

A decade ago it was Fortescue Metals Group (FMG) which tried, and failed, to negotiate (and then demand) access to the rail and port systems operated by BHP Billiton and Rio Tinto. Eventually, FMG built its own heavy haul rail and port facility.

Since that famous stand-off, and multiple legal challenges, the game has changed, but only slightly. FMG provides haulage facilities to a mine in which it has a 25% stake, but which is operated by BC Iron.

FMG proving that third-party haulage arrangements can work has weakened the defences of BHP Billiton and Rio Tinto, but the more important tests and the real game changers which could uplift a group of small iron ore hopefuls are the Roy Hill rail and the other two rail and port proposals (Oakajee and Anketell).

A fast-track for juniors

In isolation, each event is an interesting development for a particular project. Looked at collectively, a pattern emerges of an attempt to kick-start the small end of the WA iron ore industry that is dominated by three big producers – BHP, Rio and FMG.

Chinese steel mills are uneasy with the dominance of the big three, which is why Citic invested in the Sino project and persisted against all odds to finish construction despite a 200% cost blow-out.

The willingness of Citic to take the lead at Oakajee is a sign that China remains keen to break the three-way Pilbara iron ore oligopoly.

Padbury’s proposed involvement in Oakajee is another sign that fleet-footed entrepreneurs can sniff a sea-change in the Murchison iron ore sector now that Citic is considering its involvement.

A deal on access to the Roy Hill railway could be the first of the possible iron ore developments, with UBS telling clients that: “We believe other iron ore companies such as Atlas and Brockman could be beneficiaries of the Roy Hill project should the company (the Roy Hill joint venture) be prepared to provide haulage to third parties.”

Whether Rinehart and her Roy Hill partners want the additional income stream from hauling ore for other miners is a question they will be considering.