Australia to become larger iron ore quarry as new projects developed

Australia to become larger iron ore quarry as new projects developed

	Published : Fri, 16 Nov 2007 02:30 By : Agencies Print this Story

SYDNEY (Thomson Financial) - Australia is set to become an even larger iron ore quarry as more mines are developed and corporate takeovers set the scene for whole-scale expansion of the industry.

A week ago BHP Billiton fired the imagination of the marketplace by launching a 140 billion US dollars paper offer for Rio Tinto. The pair dominate Australia's iron ore mining industry which is a key supplier of the product to Asia's fast growing steel industry.

BHP Billiton highlighted the benefits of a more efficient industry if the two groups merged. Iron ore more than anything else was the logic for combining the two groups, according to chief executive Marcus Kloppers.

Kloppers claimed that a combined group would be able to share infrastructure in Western Australia's Pilbara region and coordinate new developments, meaning that the pair could supply iron ore at more competitive prices over the long-term. The Pilbara iron ore province currently supplies more than a quarter of the world's iron ore for use in steel-making.

'There's certainly logic when its comes to shipping flexibility and product mix. It (the merger) would give the combined group the ability to offer a broader product range which has benefits all round,' said Warren Edney, a resources analyst at ABN Amro.

Rio Tinto has so far spurned the BHP Billiton offer, claiming it significantly undervalues its shares and prospects. There's even reports that Rio Tinto might defend its position by launching a counterbid.

Edney said talk of a counter offer was somewhat misplaced as BHP Billiton had made a merger proposal rather than a hostile takeover bid.

He said the Rio Tinto board might be concerned that the 3-for-1 share offer did not contain sufficient premium but that didn't mean there wasn't logic in putting the two groups together.

Infrastructure challenge

BHP Billiton and Rio Tinto are currently ramping up production in the Pilbara province from existing and new mines in a move that the could see the two group's combined output from the region reaching 620 million tonnes a year by 2022.

Rio Tinto is already planning to double annual production to around 220 million tonnes a year by 2009 while BHP Billiton is planning to lift production to about 300 million tonnes annually by the end of the decade from close to 130 million tonnes this year.

Kloppers stated that a tie-up with Rio Tinto was ''logical and compelling '' given the two group's complementary assets and overlapping presence in a number of major resource basins, such as the Pilbara region in Western Australia, and joint ownership interests.

Reynolds & Co private client advisor Michael Heffernan said more iron ore miners are likely to move into production provided there's agreement on infrastructure, including companies that have deposits further to the south of the Pilbara in Western Australia's Mid-West region where deposits have been stranded because of insufficient rail and infrastructure.

'That region is getting the backing from China, which wants the iron ore but really the state government (of Western Australian) needs to sort out the infrastructure issues,' said Heffernan.

The Mid-West iron ore companies include Gindalbie Metals, Murchison Metals and Midwest Corp.

Murchison last month launched an all-scrip offer for Midwest, again based on the logic of combining project and infrastructure development but the two companies are yet to agree on terms.

There is a lot at stake with iron ore prices expected to rise more than 30 percent next year and little certainty that supply will keep up with demand until new projects are developed.

It's all about building the infrastructure needed to get ore to market but that will take time and cost billions of dollars.

There's plenty of ore as emerging Australian iron ore miner Fortsecue Metals Group Ltd proved this week.

Before even producing one tonne of ore, the company sought to boost its prospects by reporting a new deposit of at least 1 billion tonnes at its Solomon deposit in the central Pilbara.

Fortescue executive director Graeme Rowley said that there was no doubt the Solomon project could become bigger than the company's Chichester project which is expected to start producing ore at an annual rate of 45 million tonnes a year from next May.

(1 US dollar = 1.12 Australian dollars)

bruce.hextall@thomson.com

-- by Bruce Hextall --

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