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, Asia’s third-biggest steelmaker by output, and Japan’s Marubeni Corp. (8002)
Bear Plunge
Iron ore has plunged 30 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.
“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 (005490) 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.
Business Model
“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.
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