The Ore Wars the Australian Iron Ore Industry

John Rice
On November 22, 1952 Lang Hancock and his wife Hope were flying from their
grazing property in the north of Western Australia (WA) to Perth. Hemmed in by
bad weather, he piloted his single engine plane low into the gorges of the Turner
River, in WAs Pilbara region. He noticed the walls of the gorge were a deep red.
Returning soon after with a geologist, he realised he had found an iron ore
deposit in Pilbaras Hamersley Ranges that extended over 100 kilometres in
length. The iron ore deposit was one of richest and most significant on Earth, and
Hancock soon staked his claim.
So began the history of the Pilbaras iron ore industry. In the decades since,
fortunes have been made and lost by many colourful characters and
multinational firms alike. Today, iron ore is one of Australias largest and most
profitable exports. Australias iron ore industry extends well beyond the Pilbara,
but the Pilbara still holds the mother lode for this vital commodity.
The story of Lang Hancock continues to this day. Hancocks daughter, Gina
Rinehart, continues to head Hancock Prospecting, the privately owned firm that
owns the Hope Downs and the Roy Hill deposits in the Pilbara. The Hancock
familys wealth is estimated at more than $30 billion dollars in 2014 and is the
source of internecine familial disputes that are often widely reported in the
Australian media.
This case provides information to allow readers to understand the attractiveness
of the iron ore industry and why it has proved to be one of the most profitable
industries in Australia in recent years.
Iron Ore
The Earth, by most estimates, is around 4.5 billion years old. Around 3 billion
years ago, plants formed that converted carbon dioxide into oxygen. Some of
this oxygen was dissolved into the Earths oceans, reacting with dissolved iron
oxides to produce insoluble iron oxides (that is, iron-based solids that cannot be
dissolved) that in turn settled on the ocean floors. It is these layers of iron oxides
that are today mined around the world as iron ores.
The iron concentration, and thus quality, of these ores varies greatly. Historically,
many types of ores have been mined, but today the main iron ore that is mined
is hematite (Fe2O3). This hematite often coalesces with other elements, including
water, phosphorous and clays. From an economic point of view, the higher the
concentration of hematite (and the lower the concentration of these impurities),
the better. Some impurities are particularly bad for example high levels of
phosphorous are hard to remove during smelting and make the final steel brittle.
As hematite iron ore prices have increased, other iron ores have also become
economically viable. An example is magnetite (Fe3O4) which is also mined in the

Pilbara by the ebullient billionaire cum politician, Clive Palmer and his Chinese
partners.
When the iron content of these ores exceeds around 60%, it is considered a
direct shipping ore (DSO) and can be sent relatively unprocessed to steel mills.
Global reserves generally include only high quality ores, or lower quality ores
that are close to the major markets. Lower concentrations are often mined, but
these generally require additional processing that is often very costly.
Poorer ores, with lower iron concentrations, are mined and refined (through a
process known as beneficiationi that utilises a combination of magnetic
separators and gravity separators) to increase iron concentrations. Such refined
ores generally have iron concentrations above 65%, and hence command a
market premium. However, the processes and capital involved in beneficiation
are expensive, often doubling the costs of producing ores in comparison to the
production of low cost, direct shipping ores (DSO) that are dug up and shipped
with little or no processing.
Beneficiation is extremely costly both in terms of up front capital costs and
ongoing expenses. The lowest average production costs per tonne for direct
shipping ores in Australia is around $30-40 per tonne, while ores that have been
mined and then beneficiated generally cost from $80 to $100 per tonne.
Beneficiated ores generally have slightly higher market values than direct
shipping ores, as the iron content is generally in the 65% plus Fe range but this
market premium does not compensate for the extra costs.
Some deposits are thus more valuable than others. Other things being equal,
DSO deposits are the most profitable. Some of the best quality iron ore is found
in India and in western Africa. Much of the Indian production, however, is used
domestically and exports from India are limited. West Africa has enormous
potential, but significant political and sovereign risk in countries where the iron is
located has made multinational miners wary of investing the necessary billions of
dollars to bring those deposits into production.
Ideally, multinational miners like large deposits of high grade direct shipping ores
with low impurities. This describes Australias Pilbara iron ore reserves, which are
the largest among producer nations and some of the best in terms of quality.
China has large reserves, equivalent to Australias, but much of the ore is of low
iron concentration, and thus of poor quality and expensive to refine into steel.
Brazil is the other major producer and exporter, led by the former government
owned firm Vale. Vale produces the bulk of Brazils DSO iron ore (around 300
million tonnes in 2012, alongside around 45 million tonnes of iron ore pellets that
have been refined from lower quality ores.
As is the case for many mineral resources, Russia is a sleeping giant, with large
high quality reserves and comparatively low production levels. In central Russia,
the Kursk magnetic anomaly is the largest single iron ore reserve on Earth. While
much of the easily mined ore has been depleted in Soviet and post-Soviet times,

new investment could bring on line massive new mines with relatively low
production costs. Around 80% of Russias production of iron ore is used
domestically, making it a small player in the globally traded iron ore marketplace
(Russia exports around 20 million tonnes per year, mostly to former Eastern bloc
nations in Eastern Europe while Australia exports around 450 million tonnes per
year, mostly to China). Russias potential to invest in new iron ore mines in
central Russia, the Urals and Siberia, however, indicate that it could be a large
producer in the future.

Table 1: World Production and Reserves of Iron Ore

Production
(2012)
Million Tonnes

Reserves
Million Tonnes

Average
(Iron)
per
tonne
reserves
Australia
488
35000
49%
Brazil
373
29000
55%
Canada
34
6300
37%
China
1330
23000
31%
India
240
7000
64%
Iran
28
2500
56%
Kazakhstan
25
2500
36%
Mauritania
12
1100
64%
Mexico
15
700
57%
Russia
100
25000
56%
South Africa
60
1000
65%
Sweden
25
3500
63%
Ukraine
81
6500
35%
United States 55
6900
30%
Venezuela
17
4000
60%
Source:
United
States
Geological
Survey
http://minerals.usgs.gov/minerals/pubs/commodity/iron_ore/

Fe
in

The Iron Ore Market

For decades iron ore was a cheap and relatively unprofitable commodity to
produce. Australias reliance on the export of basic commodities like iron ore,
coal, gold and wool was once seen as the basis for its national economic malaise.
Its lack of an efficient manufacturing sector, and the slow long term decline in
the relative value of basic commodities compared to manufactured goods, was
seen to be providing Australia with a slow ride to economic decline.
China has emerged over the last decade as Australias largest market for iron
ore. Its demand, driven by its rapid industrialisation, has complemented existing

markets in Japan, South Korea and Taiwan all countries with significant and
longstanding steelmaking industries.
Iron ore prices, however, increased by eight times between early 2005 and early
2011, from around USD 20 per tonne to more than USD 180 (see Table 2). The
reasons for this are discussed later in this case. This radical discontinuity in
prices has had serious and profound impacts on the iron ore industry, and indeed
on Australias economy as a whole.

Table 2: Iron Ore Prices 2003 to 2013 USD per tonne, 62% Fe Spot
Price

Source:
http://www.indexmundi.com/commodities/?commodity=ironore&months=120
Iron ore is traded on two related markets the spot market and the market for
long term supply contracts. The spot market for iron ore can be extremely
volatile, depending on the vagaries of the weather, political strife in exporting
nations and annual economic and production cycles.
Prior to 2009, iron ore prices for most Australian sellers were determined by a
benchmark process. In essence, BHP and Rio negotiated, in secret, a benchmark
price each December that would be the basis for subsequent annual sales. BHP
successfully agitated against these arrangements, moving to a more fluid, spot
based market mechanism in 2009 that coincided with the significant increase in
prices and revenues achieved by the large miners.

Large buyers of iron ore generally dislike buying it on the spot market
especially when prices are increasing. Long term supply contracts, as well as
providing some certainty on costs, also tend to allow for ores of a certain quality
to be supplied. Ore furnaces are often designed with certain ores in mind, and
large suppliers can and do blend ores from different mine sites to provide an ore
of a certain Fe (iron) concentration. Likewise, some steel companies have
developed furnaces that work best with ore concentrates, processed ores with
clays and impurities partially removed. These concentrates are often processed
to an intermediate level into pellets with higher levels of Fe that command
premium market prices.
Also, steel mills in China relying heavily on the spot market for supply were
acutely squeezed as the spot price trebled from mid 2009 to mid 2010. Many of
these mills moved to ensure that this uncertainty was removed from their
operations by developing long term supply arrangements with particular
producers or particular sites owned and run by large producers under joint
venture arrangements.
As a general rule, producers prefer spot prices and consumers prefer long term
contracts. Long term contracted supply is generally restricted to production from
joint ventures, where the final customer has made a significant capital
investment up-front in the development of the ore body.
The ongoing balance between these two market arrangements (spot versus
contract) is a constant source of tension in the industry. Generally, Chinese
buyers are vociferous in their accusations that the large sellers act in concert to
manipulate prices. In December 2013, Nev Power, the FMG CEO was quoted as
saying, in the context of accusations of market manipulation by the large sellers
to inflate iron ore prices:
CISA (China Iron and Steel Association a Chinese government agency)
loves beating their drums about it but they dont do anything, they just
talk about it, and threaten and sabre-rattle.
I understand that as a country, they want to make sure the price is fair
and transparent. The price is fair and transparent it is just the market
that moves it.ii
In 2012, globalORE, a trading platform for iron ore, was established by
Baosteel, BHP, Glencore, Hunan Valin, Minmetals, Rio Tinto and Vale. It
established clear market rules, and quality benchmarks to assist in comparing
various ore grades available from established and emerging producers.
In the United States, scrap metal has emerged as a viable alternative to iron ore
in the production of steel. Large recycling firms like Nucor have developed mini
mills throughout the United States to smelt used scrap steel into new final
products using electric arc technology. In China, and in much of Asia, the limited
availability of scrap steel has meant recycled steel has been less important.

Around one third of the United States steel production is from recycled steel,
while in China this figure is around ten percent iii.
As time passes, scrap steel becomes a more viable substitute for iron ore in
developing countries as the availability of scrap steel, after its useful life is
completed, increases. For example, China is now the worlds largest car market,
and as its car fleet ages, more scrap steel will become available for recycling.
Iron Ores Uses
Iron ore has one main purpose as the main component in the production of
steel. Steel is an alloy of iron and carbon. Some forms of steel have additional
alloying elements added (for example including chromium and other alloying
elements to make stainless steel). By weight, most steel is used in construction
(for buildings, railways and infrastructure). Steel is also used in the manufacture
of cars, appliances and myriad other products. Generally, the value of the steel
used in a product is a small component of its final value.
A very typical structural steel product is an I-beam (or universal beam) that you
often see in construction of tall buildings or multi-level car parks. Steel can also
be rolled into plates and then pressed into panels for use in whitegoods, cars and
aircrafts (among thousands of other uses).
Iron Ore and the Environment
The mining, transportation and processing of iron ore to its final products has
fairly significant and negative environmental impacts. The creation of steel from
iron ore is very energy intensive, with much of this energy coming from the
burning of coal and other fossil fuels. Every tonne of steel requires around 1.5
tonnes of ore (at around 66% Fe concentration) and around 800 kilograms of
coking or hard coal.
This process, in turn, releases around 2 tonnes of carbon dioxide (CO 2), and
depending on the impurities in the ore, various other greenhouse inducing and
toxic gasses (for example, carbon monoxide and sulphur dioxide). Even these
figures ignore the CO2 produced in the steelmaking value chain in the
extraction and transportation of ores from mines to steel mills and later transport
to customers. Overall, steelmaking is a significant contributor to global CO 2
levels.
The demand for steel is disproportionately high in developing economies. As
nations like China, India, Korea and Vietnam have modernised, they have needed
steel to build their railway tracks, major buildings and to feed their
manufacturing sectors.
In 1997 (effective from 2005) many industrialised countries signed the Kyoto
Protocol which was aimed at reducing the emissions of greenhouse gases
(GHGs). In Asia, the only nation to sign the agreement was Japan, leaving other
major emitters like Taiwan, Korea, China, Vietnam and India relatively
unconstrained in terms of their CO 2 and other GHG emissions. While not an issue

in 1997, it has become a major issue in 2014. Whether this arrangement is

sustainable over the longer term is questionable, as CO 2 produced anywhere has
the same detrimental consequences. As such, reducing GHGs will be an
emerging challenge for all countries in the future, and steelmaking will be one of
the industries that must change.
Iron Ore and Government Policy
Governments are strong supporters of the iron ore industry. In Australia, the
West Australian government has facilitated the growth of the industry by
completing agreements to allow rail and port access through government owned
land. In turn, the industry pays huge royalties to the government in the FY
2011-12, Western Australia received almost $4 billion in royalties from iron ore
miners.
National governments in developing countries also take an active interest in the
iron ore industry. Nations like China, India and Vietnam are modernising fast, and
almost every aspect of their economic and social transformation relies on steel. It
is in these nations interests to maintain a steady supply of steel at low prices to
ensure their infrastructure, building and manufacturing sectors can thrive. To
facilitate this, Asian government build important commodity logistics
infrastructure to support often State-owned processing and refining companies.
Compares to western nations, developing Asian nations also have lax
environmental regulations. China, for example, is the largest consuming nation
for both coal and iron ore the consumption and processing of which contribute
significantly to the creation of environmental problems.
Iron Ores Suppliers
Digging up, beneficiating, moving and shipping iron ore is an expensive business.
The mine sites in the Pilbara host hundreds of massive trucks which when loaded
weigh around 500 tonnes, cost around $5 million to buy and around $1 million
per year to run in staffing costs alone. These figures point to a buoyant sellers
market for companies and workers who sell their products and services to the
iron ore mining industry.
The two largest suppliers of these monster trucks Japans Komatsu and
Americas Caterpillar have both seen significant sales increases to Australias
resource sector in recent years.
Generally, large suppliers like Caterpillar have seen significant global growth in
demand for its mining equipment. The following table is illustrative - as can be
seen, sales of Caterpillars resource industry machinery has increased from
around USD6 billion in 2009 to more than USD 21 billion in 2012. Caterpillars
success has been a product of growth in the global resources sector.
Table 3: Caterpillar Segment Revenues 2009 to 2012
Segment Revenue

2009

2010

2011

2012

Construction
Resources
Power Systems
Financial
Other
Total
Resources Share

8,507
5,857
13,389
3,139
1,504
32,396

13,572
8,667
15,537
2,946
1,866
42,588

19,667
15,629
20,114
3,003
1,725
60,138

19,334
21,158
21,122
3,090
1,171
65,875

18.08%

20.35%

25.99%

32.12%

USD Million - Source: Caterpillar Annual Reports

Specialist and highly trained workers are also in great demand and limited supply
in the Pilbara and elsewhere in the Australian iron ore industry. In mid-2013,
headlines were made when BHP confirmed many of its specialist iron ore train
drivers in the Pilbara commanded annual earnings in excess of $240,000 in
2012iv.
Future technological developments may well see further automation and use of
robots on mine sites and in trains, but this will tend to see greater relative
spending on technology and less employees though those workers that remain
will still be highly trained and very well paid.
World Market Demand and Prices
Chinas extraordinary economic transformation since Deng Xiaopings economic
reforms of the late 1970s have been built on steel and this demand for steel
has been fuelled by the Pilbara region While China has massive domestic
reserves of iron ore, much of it is of poor quality in terms of its Fe (iron) content.
China has emerged as the worlds largest importer of iron ore and most comes
from the massive Pilbara deposits of the Rio Tinto/Hancock Prospecting joint
venture, and from BHP Billitons massive open cut series of mines at Mt
Whaleback which are joint ventures with a variety of Japanese partners.
Most iron in Chinav is made in blast furnace smelters. Essentially, iron ore is
burned at high temperatures in the presence of carbon fuels (generally coking
coal) to produce molten metal, solid slag (or waste) and, of course, plenty of
carbon dioxide and other gaseous waste.
An intermediate product produced by these large blast furnaces is pig iron an
alloy of iron and carbon that is generally brittle and of limited final use. Pig iron
ingots are then fed to steel mills, where sulphur, phosphorus, and excess carbon
are removed (each producing toxic or harmful gasses) and alloying elements like
manganese, nickel or chromium are added to produce the exact steel alloy
specifications required by the final customer.
China has sought to diversify the suppliers of its iron ore both from other
Australian producers and globally. Chinas Baosteel (a state-owned iron and steel
company) is a large customer of, and investor in, operations of Fortescue Metals,
Australias third largest iron ore producer. Other direct and indirect Chinese
government investment in Australias iron ore industry includes an (often
tempestuous) joint venture between CITIC Pacific (majority Chinese government

owned) with Clive Palmers Mineralogy Group to develop a large magnetite ore
body in the Pilbara, a joint venture between the State owned Ansteel and
Gindalbie Metals in WAs mid-west.
<< Insert Map of Pilbara producer mines and assets, perhaps with a blow up for
mid-West producers and the NT operations of WDR >>
Both the major players, BHP Billiton and Rio Tinto, are also involved in significant
joint ventures with Chinese State Owned firms. BHP, for example, operates a
joint venture involving the State owned Wuhan Iron and Steel Group, Itochu
Minerals & Energy (Japan), Mitsui Iron Ore Corporation (Japan) TangSteel (China
State Owned), Maanshan Iron & Steel (China State Owned), and Jiangsu
Shagang Group (China one if the largest Chinese Privately Owned companies).
Rio Tinto and Sinosteel also jointly run the Channar joint venture near Paraburdoo
in the Pilbara.

These processes of upstream investment by Chinese steel mills have had a

notable and significant impact on the Australian iron ore industry. Arguably,
without Chinese support in terms of both debt and equity, many of the minor
players in the Australian iron ore industry would never have emerged, and much
of the investment in the Pilbara by Rio Tinto and BHP Billiton would not have
occurred.
Major, Medium and Minor Players in the Iron Ore Industry
There are three large international iron ore export-focused miners Rio Tinto,
BHP Billiton and Vale. Both Rio Tinto (Rio) and BHP Billiton (BHP) have strong
Australian historical connections and both have major current iron ore operations
in the Pilbara. Vale, on the other hand, is based and has most of its operations in
Brazil.
All three companies are diversified miners, but a large share of Vales revenues
come from iron ore. Around 71% of Vales revenues are from iron ore (it also
mines coal, nickel, copper and potash, among other things), while for BHP around
34% of revenues are from iron ore and for Rio, around 44% of revenues are from
iron ore.
Table 4: Firms Strategies
Excerpts from Rio Tinto Strategy Statement

We are confident that our strategy remains the right one: to invest in and
operate large, long-term, expandable, low-cost mines and businesses,
driven by the quality of each opportunity in the most attractive industry
sectors.
We are convinced of the benefits of owning a diversified asset portfolio, as
this will enable us to supply global markets at all stages of development.
But only if this is achieved in a way that maximises value for our
shareholders. So we look for high-quality assets in the right industry
sectors that provide superior returns throughout the economic cycle - with
options for growth when the time is right.

When managing and allocating capital, we balance investment to grow the

value of the business and returns to shareholders, while aiming to
maintain a strong balance sheet and retain our single A credit rating.

Excerpts from the BHP Strategy Statement

Our strategy is to own and operate large, long-life, low-cost, expandable,

upstream assets diversified by commodity, geography and market. Our
strategy has remained unchanged for over a decade and has enabled us
to deliver superior margins throughout economic and commodity cycles
for many years.
Our diversified, low cost, tier one asset base enhances the resilience of
our cash flow by reducing our exposure to any one commodity or currency
and provides for more predictable and robust financial performance. It
allows us to invest in and grow our business throughout economic cycles
thereby delivering superior long-term value to our shareholders.

Excerpts from the Fortescue Vision and Values Statement

Our vision at Fortescue is to be the lowest cost, most profitable and safest
iron ore producer. To achieve this we focus on getting the best from all our
people by ensuring that the unique culture and environment is upheld
through our vision and values.
We are a family and our culture is what guides our actions and helps us to
succeed. We are committed as one team and as such we think of the
whole business in everything we do, not just our part.

Vales Mission, Vision and Values

Mission - To transform natural resources into prosperity and sustainable

development

Vision - To be the number one global natural resources company in

creating long term value, through excellence and passion for people and
the planet.

Values
1. Life matters most
2. Value our people
3. Prize our planet
4. Do what is right
5. Improve together
6. Make it happen

Table 5: Selected Australian Iron Ore Producers (Plus Brazils Vale) Year Ending 30 Dec, 2012, $Million
Vale
(USD)
Revenue

47694

BHP
(USD)
65968

Rio
(USD)
55171

Arriu
m
(AUD)
3404

Fortescu
e (USD)
3301

Atlas
Iron
(AUD)
618

Mount
Gibson
(AUD)
416

10

(Corporate)
Iron Ore Revenues
Net
Income
(Corporate)

33978
5511

22601
10876

24279
9303

791
243

3301
478

618
98

416
52

Source: Companies Documents, Annual and Quarterly Reports

Within Australia, there is one significant second tier (based on iron ore revenues)
producer of iron ore namely Fortescue Metals Group. This firm, headed by
Andrew Forrest (nicknamed Twiggy) since 2001, produces around 15% of the iron
ore of BHP and Rio also from the Pilbara region. There are a larger number of
third tier players, including a number in production (for example, Atlas Iron and
Mt Gibson Iron both based in Western Australia and the US firm, Cliffs Natural
Resources, which produces around 8.5 million tonnes of DSO ore at its
Koolyanobbing mine that is around 400 kilometres northeast of Perth in WAs
south).
Within the minor player group, there is a variety of smaller producers or potential
producers, including Western Desert Resources a firm with a large deposit in
the Northern Territory that is due to commence exporting in late 2013, Grange
Resources, with a mine and concentrating plant in northern Tasmania and
Gindalbie Metals, with an operating mine located around 1000 kilometres south
of the Pilbara region and east of Geraldton in the mid-west region of Western
Australia.
Vertical Integration Through Ownership and Alliances
One of the Australian companies listed above Arrium is quite different from
the others. Arrium was recently renamed from OneSteel, which was in turn spun
off from BHP in 2000. Arrium is somewhat vertically integrated, producing both
iron ore from its mine in the Middleback Ranges in South Australia and also
producing steel from its Whyalla Steelworks around 200 kilometres north of
Adelaide, at the top of the Spencer Gulf. The Middleback Ranges mine was a
legacy asset of BHP when it produced both steel and iron ore. When it spun off
the steel business, the South Australian mine was deemed not to fit with the new
Pilbara focus, and was thus transferred to the new steel entity. This provided the
basis for the vertically integrated Arrium we see today.
No other Australian iron ore producer is directly involved in steel production.
Some producers (for example, Grange Resources) do some limited local value
adding in Grange Resources case by refining and pelletising lower quality
ores for export.
While vertical integration (mining ores, and making steel within the one firm) is
rare, strategic alliances between ore miners and overseas steel mills is common.
The big two (Rio and BHP) have developed significant reserves into mines in
partnership with Asian steel mills. Many of the smaller producers are also
developing long term supply relationships with Asian steel mills. These
relationships can span long term purchasing (for example, Noble Resources five
year offtake agreement with Western Desert Resources to buy ores from its
11

Northern Territory mine) to significant equity and debt investments into joint
venture operations (as is the case for Gindalbie Metals and Chinas Ansteel).
Australias Iron Ore Producers
In the following section, three Australian iron ore producers are discussed as
examples of small, medium and large producers.
Table 6: Select Producers
Million Tonnes ->
Rio (Pilbara)
Fortescue (Pilbara)
Western Desert (NT)

Ore Proven

Ore Probable
2,125
547
135

Ore Production
2014 Projected
1,138
1,797
476

260
180
3

Source: Companies Annual Reports

An Emerging Small Miner Western Desert Resources
In 2008, a significant hematite ore body was discovered at Roper Bar in the
Northern Territory, in arid country around 400 kilometres south east of Darwin
around 100 kilometres from the Gulf of Carpentaria coast. Tenements covering
part of these deposits were acquired by Western Desert Resources soon after,
and investments began to develop the resource into an operational mine.
By late 2013, when production and exports commenced, Western Desert had
undertaken extensive analysis of the ore body under its tenements. It was
estimated that the Roper Bar project has a total ore body of around 600 million
tonnes (at around 40 per cent Fe), with a more concentrated DSO section
measuring 47.4 million tonnes at 57.3 per cent Fe. Importantly, the technical
challenges of the ore body related mostly in the logistics of getting it to port
the high grade DSO was easy to mine essentially it is classed as a
drill/blast/truck/ship operation which is about as technically simple as iron ore
mining can be.
There are, however, some challenges in extracting iron ore from such a remote
location. There is little infrastructure in that part of the Northern Territory, and
Western Desert had to build a road from its mine to the coast and port facilities
to allow it to export its ores.
These efforts began in earnest over the period 2009, culminating in project
approvals in mid-2011 and commencement of mining and export in late 2013.
Western Desert are projecting exports of around 3 million tonnes per year from
2014 of the DSO resource. The private, sealed road from the mine to the port,
and associated infrastructure, has cost the company around $200 million to
build. Lower grade beneficiable ore will be stockpiled for later processing if
possible. The operating costs for the DSO operation, per tonne, is estimated in
the $60-70 per tonne range.
A Mid-Tier Producer - Fortescue Resources

12

In May 2001, Andrew Forrest had been ousted as CEO of Anaconda Metals under
difficult circumstances. Anaconda had almost gone bankrupt, with Forrest as
CEO, after it failed to deliver on promises made to investors in relation to the
development of a large nickel mine in Western Australia. Spending 2002 in
Europe on holiday with his young family, he returned to Perth in early 2003
looking for a new challenge.
He ended up taking on Allied Mining and Processing (soon renamed Fortescue
Metals Group, FMG), a small miner with some undeveloped iron ore tenements
around 100 kilometres north of Rios Pilbara iron ore mines. Forrest invested $8
million to become a 47% shareholder in the company. By 2013, his investment
had increased by about 500 times in value, and his net worth was round $4
billion.
In 2003, however, Forrest faced many problems. But he was always an optimist.
The main FMG deposit was around 300 kilometres south of Port Hedland, where
the new port was planned. First, he had to build the mine and the transport
infrastructure to get the ore to a new port, then he had to also build the port
and this would take enormous capital.
When he became CEO in 2003, iron ore was trading at around USD30 per tonne.
The economics of the project were thus marginal. It did not help that the ore
body was inferior in quality to the ore bodies being mined by Rio and BHP in the
Pilbara. Even if he could get the ore to port, it was unsure if any buyer would
want it, as the world was oversupplied with good quality iron ores at low prices.
FMG spent $170 million drilling 9,000 holes between late 2003 and 2005 to
confirm the size and quality of its deposit. The news was good the company
had found massive iron ore deposits - and coincided with a move upwards in the
world price of iron ore. Forrest set a target to commence exports in 2006. While
Fortescue did not in fact commence exporting until 2008, when it finally did,
prices were moving up strongly and FMG was in a position to deliver large
volumes of ore to the voracious Chinese market.
Forrest initially approached Rio and BHP to use their rail lines and ports, but he
was rebuffed. Many in the Perth business establishment were dismissive of
Forrest many even named him Twiggy (a twig is the smallest part of a forest),
which was a nickname that stuck. Forrest was, however, determined to make a
success of FMG, so he decided to go it alone in developing new rail and port
infrastructure for the new mines.
Between early 2005 and mid-2008, FMG spent around $2 billion developing the
necessary logistics infrastructure to get its ores to port. All the while, FMGs
geologists were exploring the Pilbara, and the company soon emerged as the
largest tenement holder in the region at a time when soaring prices were
transforming the economics for previously unprofitable ore deposits. In July 2007,
the company raised around $500 million in new equity, all the while borrowing as
much as it could from bondholders.

13

By 2013, FMG has emerged as a significant second tier iron ore producer. It
anticipates shipping 180 million tonnes in 2014, up from 80 million tonnes in
2013. As much of its infrastructure is new, its average costs of production (which
stood at around USD 35 per tonne in late 2013) should continue to decline as
mines develop and customer relationships emerge.
A Global Major - Rio Tinto
Rio Tinto is the worlds second largest producer of iron ore, and just ahead of BHP
in terms of the production of iron ore in Australia (BHP also has significant iron
ore operations in Brazil).
The geographic focus of its production is Western Australia, and more specifically
the Pilbara region of Western Australia, which is around 1500 kilometres north of
the State capital, Perth. The Pilbara is a dry and unforgiving region. The red earth
is given its colour by the iron oxides in the ground the best of which form the
important iron ores that Rio mines and exports.
Over decades, Rio Tinto has spent billions of dollars developing logistics
infrastructure in the Pilbara region to allow it to mine, transport and load iron ore
onto ships bound for markets, predominantly in Asia. This infrastructure includes
mine infrastructure, processing capacity at mine sites, living quarters, rail and
loading infrastructure and port facilities.
Rio exports most of its iron ore through two ports on the Pilbara coast at
Karratha and Dampier. BHP and Fortescues main ports are around 200
kilometres further north east, at Port Hedland. Rio also maintains an extensive
network of railway lines some 1500 kilometres in the Pilbara region, linking its
mines with its port facilities.
Table 7: Rios Pilbara Capital Investment Projects Reported in the 2012
Annual Report
Expansion of the Pilbara
mines, ports and railways
from 237Mt/a to 290Mt/a.
Rio Tintos share of total
approved capex is $8.4 bn.
Expansion of the Pilbara port
and rail capacity to 360Mt/a.
Rio Tintos share of total
approved capex is $3.5 bn.

$9.8b
n

Completion of the phase one expansion to

290Mt/a has been brought forward to the third
quarter of 2013. Dredging and piling at Cape
Lambert is complete.

$5.9b
n

Development of Hope Downs

4 mine in the Pilbara (Rio
Tinto
50%)
to
sustain
production at 237Mt/a.

$2.1b
n

Phase two of the Marandoo

mine expansion in the Pilbara

$1.1b
n

The phase two expansion to 360Mt/a is expected

to come onstream in the first half of 2015. This
includes the port and rail elements which are
now fully approved and an investment in
autonomous trains. The key component of the
project still requiring approval is further mine
production capacity.
Approved in August 2010, first production is
expected in 2013. The new mine is anticipated
to have a capacity of 15Mt/a and a capital cost
of $1.6 billion (Rio Tinto share $0.8 billion).
Rio Tinto is funding the $0.5 billion for the rail
spur, rolling stock and power infrastructure.
Approved in February 2011, the mine will extend
Marandoo at 15Mt/a by 16 years to 2030.

14

to sustain production at
237Mt/a.
Investment to extend the life
of the Yandicoogina mine in
the Pilbara to 2021 and
expand
its
nameplate
capacity from 52Mt/a to
56Mt/a.

$1.7b
n

Approved in June 2012, the investment includes

a wet processing plant to maintain product
specification levels and provide a platform for
future potential expansion.

The capital costs involved in Rios Pilbara iron ore activities are notable (refer
Table X). As Rios operations spread further south and east away from its ports,
the costs involved in new infrastructure increases. It is estimated that the
Yandicoogina mine, approximately 200 kilometres east of Rios first mine at Tom
Price, will eventually require capital investments exceeding $1.7 billion to
produce 4 million tonnes per annum of exportable ores.

15

Table 8: Rio Tinto Iron Ore Reserves Proved and Probable 2012
Proved
2012

Ore

Probable
2012

Ore

Rio Tinto share

Million
tonnes

% Fe

Million
tonnes

% Fe

Share
(%)

Million
tonnes

18
422
188
16
10
74
6
262
209
115

62.9
62.3
63.5
64
61.1
62.8
62.9
62.3
58.6
58.6

26
139
23
44
1
92
7
74
0.4

61.4
61.3
61.2
63.4
59
62.4
63.9
61
56.9

100
100
100
100
100
100
100
100
100
100

44
561
211
60
11
166
13
336
209
115

24
40
9
76

63.1
62.7
61.3
62.9

18
9
241
55

62.7
62.7
61.6
63.3

60
54
50
50

25
27
125
65

320

65

235
7.4

65
55.1

58.7
57.7

326
4

175
161
2125

57.3
62.2

99
67
1138

57
60.9

53
53

145
121
2,564

38
1,844
6.1
1888

61.3
65.5
61.4

100
50.4
100

99
928
78
1105

3026

61.4

Reserves at operating mines

Hamersley Iron (Australia)
Brockman 2
Brockman 4
Marandoo
Mt Tom Price
Mt Tom Price
Nammuldi
Paraburdoo
Western Turner Syncline
Yandicoogina

Yandicoogina
(Process
Product)
Channar JV (Australia)
Eastern Range JV (Australia)
Hope Downs JV (Australia)
Hope Downs 4 (Brockman
ore)
Iron Ore Company of Canada
Palabora (South Africa) (t)
Robe River JV (Australia)
Pannawonica
West Angelas
Total @ Producing Mines

Reserves at development projects

Silvergrass East
Simandou (Guinea)
Turee Central (Australia)
Total
@
Development
Projects

61

62.7

72
133

62

Rio
Tinto
Reserves

2258

62.0

Total

Ore

3669

Source: Rio Tinto Annual Report, 2012

Interestingly, Rios largest single potential mine is at the Simandou deposit in
eastern Guinea, western Africa. The Simandou Ranges, where the deposit is
located, are part of the Guinean forest ecosystem of West Africa, which
ecologists suggest is one of richest and most diverse ecosystems on Earth.

16

Hundreds of millions of years ago, before the modern continents of South

America and Africa formed, this deposit was geographically close to Vales
massive deposits in the State of Para in Brazil as part of the Gondwana
supercontinent and probably formed at the bed of the same inland sea.
To date, Rio has not made major investments in Guinea. The mine will require a
650 km railway to from the mine to the coast at Matakong to allow for exports,
primarily to China. If all goes to plan, exports should commence in 2016, but
plans like these, given the complexity of the project, could be optimistic.
Summary
Australia is often termed The Lucky Country. It is indeed to have massive, high
quality iron ore reserves, especially in the Pilbara region. However, for many
years, this ore was priced at little more than it cost to mine and transport, and
the business was poor.
The transformation of Asia, and especially China, changed all that over the space
of three years. Between 2007 and 2010, prices more than trebled, and the
massive mines and deposits owned by the two iron ore majors Rio and BHP
began making their owners billions of dollars every month.
The growth was not without challenges. Extracting more and more ore required
more and more capital investment. A key question would prices stay high?
Another question would upstream partners in Asia contribute capital in
exchange for guaranteed capacity of ores at lower prices? A third question
would new entrants, dazzled by the profits being made, flood into the industry,
driving down prices and cutting the profits of the majors.
By late 2013, some answers had emerged. The ore price would fall from its 2010
highs, but it would remain comfortably above USD100 per tonne a price well
above production costs for the established Pilbara producers, and for the
emerging firm Fortescue.
Asias steel mills would continue to join with established and emerging miners to
bring on line new production. Indeed, there seemed a strong intention to create
new miners in Australia to break the strangehold on the market by Rio and BHP
evidenced by partnerships with medium and smaller firms like Clive Palmers
Mineralogy, Gindalbie Metals in WAs central region and the emerging miner
Western Desert Resources, in Australias Northern Territory.
New entrants had emerged, but their path to production was often troubled.
Miners extracting ores with lower Fe levels required beneficiation processes prior
to export and this was sometimes technically complex, expensive and innately
risky. Miners with small, high Fe deposits in the Pilbara found it hard to get
access to transport and port facilities. Small miners away from the Pilbara often
needed to start from scratch in terms of infrastructure never an easy task.
The industry is still attractive. In 2012, Rio and BHP, between them, made almost
$500 million per week from iron ore almost all from their Pilbara mines. Mining

17

and transporting their ores to port costs the majors around USD 50 per tonne,
while at the time of writing prices were around 3 times that. If future profits of
only USD 50 per tonne are achieved, Rios Pilbara mines alone could deliver $100
billion in future profits over their lifetime.
Still, a winners curse scenario might be brewing. Prior to 2003, iron ore prices
were far less than the current costs of production in the Pilbara. Should Asias
growth slow, demand for steel could fall steeply, with prices for iron ore following
suit. A lower carbon future for the world will also make recycled steel more
attractive to the detriment of steel produced from iron ore.
In such a scenario, much of the capital assembled in the Pilbara could be
gathering dust in the years to come, rather poetically returning to the rust from
whence it came.

18

i Beneficiation iron ores that are magnetite-based are magnetic, and the beneficiation of
these ores generally requires grinding the ores to a tiny size such that the silicates (sand) and
iron oxides can be separated by passing the blend under a magnetic separator.Hematite
beneficiation is a little more complex. As hematite is not magnetic, the ore is crushed and
passed through a bath containing water and bentonite (or other heavy and soluble elements).
This makes the solutions density (or specific gravity) between the density of hematite (which is
heavy) and silicate (or sand, which is relatively light). In this process, the silicates float, and the
hematite sinks, and is thus able to be collected from the bottom of the bath.
Large scale beneficiation plants are very costly, and can run into hundreds of millions of dollars
of capital costs and significant ongoing running costs without greatly adding to the value of the
ore.

ii http://www.businessspectator.com.au/news/2013/12/6/china/china-sabre-rattlingiron-ore-price-fmg-chief
iii http://www.worldsteel.org/statistics/crude-steel-production.html

iv http://www.abc.net.au/news/2013-10-30/are-train-drivers-in-the-pilbara-the-highestpaid-in-the-world/5029012
v The Chinese scientist Du Shi first developed blast furnace technology around the
year AD 31, more than a thousand years before it was invented in Europe!