Shouldering a burden: Costs are under the microscope. Photo: Louie Douvis
MEDIA speculation that Andrew Forrest's Fortescue Metals and Gina Rinehart's $10 billion Roy Hill iron ore project might do a deal to share infrastructure rather than construct separate rail lines could save both companies more than $1 billion, industry sources say.
It comes as certain contractors that were expecting to do work for Roy Hill are bracing for a formal notification before the end of the month that all or parts of the project will be stalled until iron ore prices improve, financing has been finalised and the contracting strategy with Posco is worked out.
Some early contractor involvement (ECI) workers have already gone and others are expected to be told to leave before the end of the month.
There is a lot of talk in the industry that Rinehart is struggling to get the banks over the line to finance the project. The Roy Hill project is estimated to cost $10 billion, with debt finance of $7 billion required, of which $4 billion is to come from export credit agencies in the US, China and Korea and the rest from traditional banks.
However, some well-placed sources believe if iron ore prices stay above $US60 a tonne, Rinehart will have no trouble getting the required financing - as long as she sorts out the contracts to ensure sound integration for the mine, rail and port.
Indeed, some believe if the banks get wobbly and want collateral to guarantee completion of the project South Korea's Posco, which owns a stake in Roy Hill and is the engineering, construction and maintenance contractor for the port and mine, will put its balance sheet behind the deal to ensure financing.
Posco is not the contractor for the railway line. With times becoming challenging for both Roy Hill and Fortescue a deal to share the railway would remove rail from Roy Hill's timetable.
It is understood that Fortescue has discussed the proposal at board level on a number of occasions over the past three years, including a more recent offer to duplicate and extend Fortescue's rail line including adding a spur line from its railway to the Roy Hill mine site. This could save Rinehart more than $1 billion, a source familiar with the proposal said.
Finding a way to co-operate makes sense, but Rinehart is said to have vetoed its latest approach. Rinehart plans to build a 340-kilometre rail line, which industry sources estimate could cost up to $6 million a kilometre, or $2.04 billion.
Fortescue struck a deal with BC Iron in 2009 to gain access to its infrastructure in return for 50 per cent of its iron ore deposit in the Pilbara.
While sharing infrastructure looks like a no-brainer, Rinehart is known for being a tough and difficult negotiator. Her dealings with Forrest are no exception.
Still, with the first stage of the mining boom fading fast - iron ore prices are falling, costs remain too high, and raising finance is becoming increasingly difficult - revisiting a deal between the billionaires Rinehart and Forrest might not be out of the question.
Rinehart's Roy Hill project and Fortescue's Cloudbreak back onto each other and Rinehart never objected to Fortescue's rail line going through Roy Hill.
The banks are not explicitly pushing for a deal but they would undoubtedly look favourably on lower capital expenditure and shared infrastructure.
Rinehart, whose comments about African workers being paid $2 a day went viral last week, has long been pushing the need to lower costs in Australia to become more competitive. If she struck a deal with Forrest, she would immediately reduce her costs.
Her comments, designed to educate and wake up people, came after writing an article in a mining magazine where she said the minimum weekly wage should be reduced and people who are
jealous of the rich should work harder instead of drinking, smoking and socialising. ''There is no monopoly on being a millionaire,'' she wrote.
Rinehart has espoused similar views for years. They echo her father Lang Hancock's views. But her latest comments show a growing concern at the deterioration in mining conditions.
Fortescue's shares have been under huge pressure in the past few weeks as hedge funds punt it will need to raise equity, although hopes of a China revival and speculation that it might become a takeover target have helped to spur a jump of about 15 per cent in the past two trading days.
The rumour on Friday was that BHP Billiton would bid for Fortescue, and similar chatter will keep Fortescue's shares aloft.
Whatever happens to Fortescue in this volatility, it's a fair bet that the winds of consolidation will blow hard across the resource sector over the next 12 months.
So, too, will mine closures, the mothballing of projects and asset sales as falling commodity prices, high costs and pressure from the banks starts to take a grip.
The cashed up miners will be in the box seat to take advantage of any bargains.
Some miners, including OZ Minerals, will do well, having earlier missed out on assets because they were too expensive. However, it and other
cashed-up entities will be in no rush and can afford to wait until projects hit the wall and are in the hands of banks.
As one banker said: ''Why pay any equity value?''