Gina Rinehart risks all on Roy Hill iron ore mine

As the world's richest woman, with a guaranteed annual royalty income stretching into the stratosphere, Gina Rinehart could have simply sat back and watched her fortune grow.

Instead, she embarked on a hugely ambitious, high stakes gamble to become a major iron ore producer, to fulfil her father's ambitions and cement her reputation as a businessperson in her own right.
But the timing couldn't have been worse. In the past year, her fortune has evaporated at a rate of about $15 million a day.
"In the 2014 rich list we valued her at about $20 billion. She's now down below $15 billion. Approximately 36 per cent has been wiped from her wealth," said BRW Rich List's Michael Bailey.
The reason is the dramatic fall in the iron ore price, which has sunk to a new six-year low under $US60 a tonne. The price has halved in the past year alone and is now less than a third of its 2011 peak.

 

 

Photo: Gina Rinehart signs a $US7.2 billion finance deal for

 the Roy Hill project. (Supplied: Roy Hill)

We need to see bankruptcies before it's over.

Andy Xie, economist

"We've been surprised by the speed and pace of the fall in price, but the direction has been expected for some time by the market," said UBS commodities analyst Daniel Morgan.
The low price is a blow for Gina Rinehart's family company, Hancock Prospecting, whose prime source of cash is a lucrative iron ore joint venture with Rio Tinto, along with the decades old Rio royalties.
The Hope Downs Joint Venture accounts for most of the $2.6 billion in revenue the company made last financial year.

Iron ore price may fall below $US40: analyst

The pressure will continue to mount for miners with economists warning the price of iron ore could fall much further.
Andy Xie is an independent economist based in Shanghai who previously worked for Morgan Stanley and the World Bank.
He was one of the few to accurately predict the Asian crisis in 1997 and the sub-prime mortgage crisis in 2008, and now he believes iron ore will slump below $US40 dollar a tonne.
"On the production side, the supply is still rising, when Chinese demand is declining - obviously there needs to be a price war," said Mr Xie.
"We need low prices to take out some high-cost production capacity.
"In China, or elsewhere, I think the fair price might be between $US50-60 but, in order to take our high cost capacity we need the price to go lower, we need the price to go under $US40 for some of the projects to be taken out - i.e. we need to see bankruptcies before it's over."
Commodities analysts in Australia are less bearish.
"I wouldn't have thought $US30 - that would wipe out nearly all production," said head of research at Patersons Securities, Rob Brierley.
"There are times when the market overshoots both positive and negative, so it could go as low as mid-$US50s in the near term I would have thought."
Even at that price it is unfortunate timing for Gina Rinehart to be taking on the biggest gamble of her career - to operate her own mine - the $10 billion dollar Roy Hill project.
When it ramps up to full capacity, it will be Australia's fourth largest iron ore producer, behind Rio Tinto, BHP and Fortescue.

A father's dream fulfilled

Historian David Lee said it is fulfilling her father Lang Hancock's dream.
"Lang Hancock's main fortune was built on royalty deals. He wasn't able to bring to culmination some of the more ambitious ventures in his own right to establish a mine," he said.
"That was certainly one of his long-term goals - he pursued it vigorously over many years. I think Gina Rinehart is continuing the family tradition in this regard."
After a ten-year struggle, Gina Rinehart negotiated a $7.9 billion debt deal using a combination of multiple export credit agencies and commercial banks.
It is considered a smart deal - because she shares the risk with her Asian-based joint venture partners - Posco, Marubeni and China Steel Corporation.

It's about more than money for her - she could live a very hedonistic lifestyle and do nothing else.

Michael Bailey, BRW Rich List

"To finance this project has been the largest mainland mining resource financing project in the world. We're talking about a big amount of money gone in to make possible what we're beginning to see today," Gina Rinehart told a company dinner last year.
"But firstly, I'm sorry, it's only recently using that money - it has been ourselves and our partners who have dished in to their pockets and contributed almost all that you see today."
That is something that has gained Mrs Rinehart the respect of many in the business community.
"She's not collecting trust payments and just sitting on them as some people might do if they got a big inheritance," said UBS analyst Daniel Morgan.
"She's determined to make her own way ... It's about more than money for her - she could live a very hedonistic lifestyle and do nothing else. She's obviously got some of the entrepreneurial spirit Lang Hancock had and is determined to make something," said BRW's Michael Bailey.

Roy Hill has 'half-decent' ore

Determined or not, much of the project's success comes down to the quality of the iron ore.
"The Roy Hill mine, I think they may have some half-decent quality - 59-60 per cent [iron content] - product in early years but, over the life of the mine, the grade is very similar to Fortescue's Chichester ranges at around the 58 per cent mark, commanding a discount of $US10 a tonne," said Rob Brierley.

The breakeven [for Roy Hill] might be in region of $US50 a tonne.

Daniel Morgan, UBS commodities analyst

With the iron ore price dropping, the discount becomes even more important and the break-even price is the key.
Fortescue chief executive Nev Power admitted in January the miner is making as little as $US7 a tonne, but was working hard on lowering costs. Since then, however, iron ore prices have fallen further.
"For their Roy Hill project which is not in production yet, and yet to demonstrate these numbers, the breakeven might be in region of $US50 a tonne," said Daniel Morgan.
Roy Hill is a 55 million tonne per year project and, when it comes on-stream, it will add to the oversupply - potentially pushing prices even lower.
The biggest and lowest cost miners - BHP, Rio Tinto and Brazil's Vale - are all pumping more production on-stream.

No price bottom without bankruptcy: analyst

Economists say it means junior miners will go under.
"I think some of them will go bankrupt. When the iron ore price has bounced you will read it in the news - people will go bankrupt," said Andy Xie.
"Until we see bankruptcy, the price has not bottomed. This year you should be able to see this drama unfolding."
The fall in the iron ore price is the latest drama for Gina Rinehart.
She is suing Channel 9 over the 'House of Hancock' miniseries, and she has had highly publicised bitter court disputes with her children and Rio Tinto.
One thing is clear. Gina Rinehart is a formidable force.
"I think in a way she is already much more successful than Lang Hancock, and she has probably already achieved many things that Lang could not," said mining historian David Lee.
Roy Hill will be her greatest achievement - so long as the slump in prices does not continue indefinitely.
You can see Emily Stewart's story tonight on The Business at 4:30pm and 8:30pm (AEDT) on ABC News 24 and 11:00pm in your local time zone on ABC. 

Source: http://www.abc.net.au/news/2015-03-10/gina-rinehart-risks-all-on-hope-downs-mine/6293898