Demand doubt as Roy Hill comes online

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 15 Apr 2015   Posted by admin


Roy Hill overland conveyor and South West Creek wharf. Image: Roy Hill

By Jane Goldsmith

April 15, 2015

AMID plunging iron ore prices, Gina Rinehart’s Roy Hill project is one of just a handful of companies still hiring on a large scale.

The 55 million tonne per annum iron ore operation has employed more than 25,000 workers since beginning construction in mid-2011, and currently employs more than 7200 people from 200 contractor companies across Australia.

However, despite its considerable contributions to flailing employment rates, industry analysts have questioned Roy Hill’s development timing, with the $10 billion project expected to worsen a global supply glut. Iron ore spot prices have halved across the past year, and in March, fell below US$50/t.

“The timing is abominable. They’re forcing supply into a market that doesn’t want it,” Morningstar Independent Investment Research analyst Matthew Hodge told AAP in March.

Morgan Stanley confirmed the slump in its quarterly review, predicting seaborne supply would exceed demand by 55 million tonnes in 2015.

“The apparent loss of investment confidence in China’s broader industry is exaggerating the bearish impact of Australia’s ongoing supply growth,” Morgan Stanley analysts Tom Price and Joel Crane said.

“With only months left before the mid-year peak in sales of commodity-intensive goods, time is running out for China to support commodity prices in 2015.”

Roy Hill Holdings chief executive Barry Fitzgerald said at the Global Iron Ore and Steel Forecast conference in March that despite the bleak outlook, Roy Hill was still on track for its target first shipment by September.

“There’s no doubt both the shareholders and the financiers would like us very much to complete the project, to commission it, and then ramp-up as efficiently and effectively as we can,” he told The Australian at the Perth-based conference.

“I love the Australian dollar being weaker against the US dollar. In terms of the iron ore price, I wish it was two years ago. But neither of those is necessarily going to happen, so we will deal with the situation that we have.”

 

Background and financing

The Roy Hill project, 115km north of Newman, dates back to 1993 when Hancock Prospecting began reconnaissance drilling at the site. The prefeasibility and bankable feasibility studies demonstrated the site’s robust nature, which prompted the company to begin negotiating joint ventures to develop the project.

In 2010, Korea’s POSCO Group bought into the project with a small initial transaction to fund the almost-completed bankable feasibility study and begin early dredging works at Port Hedland harbour.

In March 2012, Hancock Prospecting (via subsidiary Roy Hill Holdings) consolidated its current 70 per cent ownership, after finalising $3.2 billion worth of equity agreements with POSCO, Japan’s Marubeni Corporation, and South Korea’s STX Corp (15 per cent, 12.5 per cent and 2.5 per cent respectively). Various deals changed the joint venture’s proportional holdings to POSCO (12.5 per cent), Marubeni (15 per cent) and China Steel Corporation (2.5 per cent). Roy Hill is the only independent iron ore project with WA-majority ownership.

On 20 March 2014, Roy Hill secured a record-breaking US$7.2 billion financing package from five international export credit agencies (including Japan Bank for International Cooperation, Export-Import Bank of Korea and Export-Import Bank of the United States), and 19 commercial banks from Australia, Japan, Europe, China, South Korea and Singapore.

“Roy Hill is a mega-project of national significance for Australia and international importance. I prefer to say it’s an Australasian effort because of the strong support of our partners, financiers, contractors and equipment suppliers in the region, and stretching to the United States,” Ms Rinehart said.

“We spent over two years working to finalise the financing package to make Roy Hill happen. [It is] the largest ever mainland project financing for anywhere in the world.”

 

Project development

Roy Hill is one of the largest mining operations in the Pilbara, with JORC-compliant ore reserves of 776mt of iron ore for a 17-year expected mine life, with additional expansion possibilities totalling 12 years beyond the initial life.

The initial project will see about 272mtpa of moved material to produce about 68 million wet metric tonnes per annum of ore. Mining began in April 2014 and first shipment is scheduled for September 2015.

The integrated, low-cost production project includes a 55mtpa processing plant with a crushing station, stackers, reclaimers and laboratory equipment; a 344km independently owned and operated heavy-haul railway; 55mtpa private port facilities; a 2.5km Ginbata air strip; and 6 square kilometres of accessory onsite buildings, including offices, control rooms, and four 300-person accommodation villages. Qantas has provided exclusive charter operations for the mine’s FIFO workforce since August 2013 under a three-year agreement.

The 55mtpa Roy Hill railway runs between the mine and dedicated stockyard facilities at Port Hedland. Five ore trains will operate per day from a fleet of 21, each consisting of two diesel electric locomotives hauling 232 ore cars with a total payload of 31,132t of ore. The first 14 trains arrived from the US earlier this year, and at a ceremony in March, Locomotive 1001 was christened ‘Ginny’, after Ms Rinehart’s daughter, Ginia.

Roy Hill’s port facility at Boodarie Industrial Estate, south of Port Hedland, will receive, stockpile, screen and export up to 55mtpa of lump and fine iron ore.

The in-load port stockyard and rail loops include a 11,250 tonne per hour rail car dumper and a conveyor system; two 13,000tph rail-mounted slackers; a 12,000tph bucket wheel reclaimer; and a surge bin and screening house. The stockyard can store more than 2.3mt of ore, with adjacent space for additional material as necessary. The out-load port and wharf facilities include four load-out conveyors; an 800m, two-berth wharf; and a 14,400tph ship loader.

 

Australian iron ore

In response to Roy Hill’s critics, Ms Rinehart said that if Australia were to cut its iron ore output, global market prices would generally remain unchanged as other countries would simply bridge the gap.

“If only we could do something about that falling iron ore price,” she said.

“Well we can’t. If Australia doesn’t supply iron ore, there’s other counties who will.

“Despite what some outside of our industry are encouraged to think, getting Roy Hill to where it is today has taken enormous persistence, perseverance and hard-work, not to mention considerable financial risk.”

Ms Rinehart emphasised that the additional tonnes Roy Hill would pump into the overloaded market were less problematic to Australia’s iron ore industry than the “onerous burden” of its government approvals process.

“We had to contend with the onerous burden of thousands of government approvals, permits and licences, any of which could have risked the ultimate end value of the project, and all of which add expense to the project,” she said.

“These were immense government burdens which, despite our money spent, meant the project remained high risk and of little value for many years. Over regulation is not just an issue facing the mining industry in Australia, it is an issue being faced by companies around Australia, and creates an unfair playing field for small businesses who simply cannot tackle projects such as ours, and we must all work to persuade governments to reduce this burden on business.

“It should be an increasing priority given, for instance, both our governments state and federal being in record debt, hence needing more revenue, and given the continuing fall in commodity prices – international prices which Australia can’t do anything about, so reduction on costs such as government burdens, are obviously important if Australia wants to stay internationally competitive and to retain its living standard.

“Tough times ahead, if we don’t do something to reduce unnecessarily onerous government cost burdens.”