Steelmaker POSCO has revealed the iron price needed for Roy Hill to break even

Gina Rinehart's Roy Hill mine is struggling to make a profit at current iron ore prices, according to one of  Mrs Rinehart's partners in the project.

Korean steelmaker POSCO has revealed that Roy Hill, which shipped its first product from Port Hedland in December, requires an iron ore price in the low-$US40-a-tonne range to be in the black.

Gina Rinehart's Korean joint-venture partner has revealed the iron ore price needed for the company to break even.
Gina Rinehart's Korean joint-venture partner has revealed the iron ore price needed for the company to break even. Photo: Joe Armao

POSCO owns 12.5 per cent of Roy Hill, in partnership with China Steel Corporation, Japanese company Marubeni and Mrs Rinehart's Hancock Prospecting, which owns 70 per cent.

The steel giant said Roy Hill's marginal cost of production would fall into the mid-$US30-a-tonne range once the mine was producing at full capacity, which is expected to happen in 2017.

Gina Rinehart's Hancock Prospecting paid almost $500 million in tax last year, at a 30 per cent tax rate on its $1.5 ...
Gina Rinehart's Hancock Prospecting paid almost $500 million in tax last year, at a 30 per cent tax rate on its $1.5 billion taxable income. 

"Roy Hill will target to ramp up by early 2017. At the initial stage, the marginal cost would be early $US40/tonne, and when the utilisation rate goes up, it will be down to mid-U$30/tonne. In current price, Roy Hill will make profit," said POSCO in a question-and-answer document posted on its website.

The comments were made last week, when iron ore was fetching $US42.43 a tonne.

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The benchmark iron ore price has since fallen to be $US41.72 a tonne on Monday, meaning the commodity is now trading close to Roy Hill's break-even price.

The comments come despite the fact that almost 90 per cent of Roy Hill's iron ore is sold under long-term contracts, meaning only a minority of its product has exposure to the spot market.

Roy Hill spokesman Bill Hart declined an opportunity to confirm that POSCO's numbers were correct.

"Roy Hill does not comment on the specifics of its cost position. Roy Hill is focussed on ensuring the business is cost competitive in all market conditions and management will continue to focus on all opportunities to reduce costs and maximise margins," he said.

If the prices quoted by POSCO are correct, they suggest that Roy Hill is a more expensive producer of iron ore than Fortescue Metals Group, which is believed to require an iron ore price of $US28-$US32 a tonne to break even.

Fortescue is believed to be Australia's third-cheapest producer of iron ore, behind Rio Tinto and BHP Billiton.

UBS had estimated in December that Roy Hill's break-even price would be $US43 a tonne.

The comments were published on POSCO's website after the Korean company posted a net loss of 96 billion Korean won for 2015 on the back of impairments and foreign-exchange losses.

The steelmaker indicated that a portion of those foreign-exchange losses related to Roy Hill.

"During 2015, we had recognised forex-related equity loss on Roy Hill," the company said in the same statement, indicating the losses would fall in 2016. 

Break-even prices for most iron ore and coal miners have fallen significantly in the past two years on the back of a weakening Australian dollar, deflating labour costs amid a cooling economy and lower energy costs thanks to the weaker oil price.

Fortescue's cost of production has halved during the past two years, according to Macquarie analyst Hayden Bairstow.

POSCO said the break-even price of Australian iron ore and coking coal producers could yet fall further.

"The concerning issue is that Australian miners are maintaining their production level. Due to the weak Australian dollar, the marginal cost of miners could go down slightly further," said the steelmaker. 


 

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