EVER since Atlas Iron shipped its first tonne of iron ore out of Port Hedland back in 2008, the David Flanagan-headed miner has been the benchmark for Western Australia’s other junior iron ore hopefuls.
Today, there’s no shortage of smaller players running around WA looking to replicate Atlas’s growth from an inconspicuous minnow worth just $9 million into a $3 billion miner that recently declared its maiden dividend.
Those looking to follow in Mr Flanagan’s footsteps face a number of challenges, such as huge capital expenditure requirements and securing vital infrastructure access.
“There’s a lot of stuff going on in that space and you’d have to say it’s really anyone’s call as to who is going to be the next Atlas, if indeed there is a next Atlas,” Hartleys analyst Ben Crowley told WA Business News.
“The level of capex you’re talking about to get any of these things off the ground is a big hurdle for junior-sized companies.”
As is Atlas itself.
In the past few years it has completed takeovers of Giralia Resources, Aurox Resources and Warwick Resources, and the company currently has a bid on the table for FerrAus. Those deals have been motivated as much, if not more, by Atlas’s desire to secure those companies’ precious allocation of capacity at Port Hedland as it has by their iron ore resources.
One attribute that allowed Atlas to get a head start on its peers was its ownership of iron ore resources close to Port Hedland itself. That proximity made it economic for Atlas to simply truck its iron ore straight to the port, allowing it to bypass the lengthy and complicated negotiations over rail access that have slowed the progress of many of its smaller rivals.
“If you look at the way Atlas built the company, I think that’s a pretty key difference between Atlas and what many of the other guys have done out there, which is to try and find a deposit that is big enough to raise the capex required to go the whole hog right up front,” Mr Crowley said.
The other junior players are all deeper inland, leaving them largely dependent on negotiating access deals to the infrastructure of the bigger players. That’s no easy task, given the miners owning the infrastructure are all involved in major expansions of their own and do not have a massive incentive to give smaller players a helping hand.
One ray of light for some is the proposed Anketell Point port development, with Aquila Resources and Fortescue Metals Group each pitching to develop the new port and associated rail.
The juniors stand a much better chance to negotiate third-party access up front, and getting in early could help underwrite the economics of the development.
Flinders Resources managing director Gary Sutherland is one man watching the Anketell Port situation very closely. His company’s central Pilbara project is surrounded by a number of possible infrastructure solutions, including Rio Tinto’s rail and FMG’s proposed Solomon rail line, but it appears Anketell may represent his best option.
“If I was building a 200 to 300-kilometre railway line, that’s a hell of a lot of capital and if someone was able to put on another 15 million tonnes a year of iron ore reliably for 15 or 20 years, then it’s not a bad way of recouping some of my capital,” Mr Sutherland said.
As difficult as cracking the iron ore market may be, the incredible growth stories evidenced by the likes of Atlas and Andrew Forrest’s FMG, not to mention the bumper iron ore-fuelled profits handed down by Pilbara giants BHP Billiton and Rio Tinto, means there will be plenty of effort among the juniors to overcome those challenges.
WA Business News took a look at the most advanced crop of juniors looking to become the next to crack the iron ore industry, and found a diverse range of companies linked together by common challenges and common goals, but at very different stages of solving them.
Brockman Resources, with its market capitalisation of around $460 million, is the largest and arguably most advanced of the WA iron ore up-and-comers not yet in production.
The company, which is now controlled by Wah Nam International after the Hong Kong-based group picked up 52 per cent in a takeover bid earlier this year, is deep into a bankable feasibility study into the development of its 1.6 billion tonne Marillana deposit northwest of Newman in the Eastern Pilbara.
The study, due for completion by the end of this year, will consider the economics of an 18.5 million tonne per annum mine that would make it a top-five Australian producer by the time it hits full output by 2014.
While Brockman has secured all-important port capacity at Port Hedland, it still needs to find a solution for how it gets the ore there.
Brockman managing director Wayne Richards has set himself the target of securing a final rail infrastructure solution by the end of the year. Brockman is also in negotiations with Fortescue over a rail, port, shipping and marketing services agreement.
Covering the estimated $2 billion cost of developing Marillana will be no easy task, but Mr Richards has indicated the company could eventually target the Chinese connections of major shareholder Wah Nam for finance.
“With regard to funding options, we’re looking at options ranging from traditional project financing through to potentially seeking a joint venture partner who earns an equity stake in the project for the equivalent level of equity determined for the project financing,” Mr Richards said in a recent statement.
“If we decide to go for a traditional combination of equity and debt, we’ll be looking to Wah Nam in Hong Kong, and its connections into the Asian financing markets and experience as corporate bankers, to support us in structuring the optimal financing package for the project.”
Beyond Brockman, FerrAus is seen as the next company most likely.
FerrAus also found itself the subject of a Wah Nam takeover earlier this year up until it received a higher offer from Atlas.
FerrAus, currently valued by the market at around $230 million, is also aiming to complete a definitive feasibility study into the development of its iron ore assets east of Newman by the end of this year.
The company’s $960 million development, based upon a 331 million tonne iron ore resource, would support 15 million tonnes a year of production from 2014. Crucially, FerrAus also has the necessary capacity allocation at Port Hedland.
BHP’s railway network sits 30km away and represents on paper the most obvious rail solution, although getting BHP’s support for such a move has to date proved elusive.
Flinders Mines has a similar market cap to FerrAus and is targeting the same production capacity (15mtpa) and start-up date (2014) and a similar capex estimate ($1.1 billion).
Yet Flinders boasts a much bigger resource base than FerrAus, having currently defined just under 750mt of iron ore in what is arguably a superior location serviced by more rail options.
The key difference is that Flinders – a comparative newcomer to iron ore exploration – does not have a port allocation, giving it a slightly less clear path to cash flow.
Mr Sutherland is confident that a breakthrough on infrastructure is closer than the market gives Flinders credit for.
“We wouldn’t have embarked on [a definitive feasibility study] if we weren’t exceptionally confident about getting the right infrastructure outcome,” he said.
“Where there’s a will there’s a way, and we don’t get the vibe that a solution is impossible. Quite the opposite.”
Iron Ore Holdings, which counts Kerry Stokes as a major shareholder, is in a similar position to Flinders. It too is carrying out a definitive feasibility study into a 15 million tonne per year mine, and it too is in ongoing discussions with potential project partners over infrastructure access.
IOH is a classic case study of the difficulty for juniors to negotiate deals with the majors, with a deal that would have seen the company sell ore directly to Rio Tinto falling over last year.
One iron ore hopeful that is well away from the Pilbara infrastructure challenge is Golden West Resources, which is sitting on 130 million tonnes of iron ore to the west of Wiluna in the Yilgarn region.
Golden West is eyeing two routes to export, the soon to be expanded Esperance port – where it has a 3mtpa capacity allocation – and the proposed Oakajee port and rail development.
Golden West had eyed Esperance – which will require trucking ore 320km south to Leonora and then sending it by rail 650km to the port – as a short-term option before expanding to 10mtpa through Oakajee. The clouds currently over the deliverability of the Oakajee Port & Rail project means Golden West’s long term plans are similarly up in the air.
At the more junior end of the scale, Winmar Resources has made rapid progress with its namesake iron ore project since acquiring control of it from Cazaly Resources earlier this year for $4 million in cash and shares.
Since then, Winmar has lifted the resource base from 143mt to 241mt, and is eyeing an ultimate exploration target of 350mt to 400mt. A soon-to-be-completed scoping study is assessing infrastructure options.
Winmar counts among its shareholders FMG founder Andrew Forrest, and while Fortescue’s proposed Solomon rail line would suit Winmar, any agreement is still some way off.
“We have met, there’s been some initial discussions, but it’s still very early days,” Winmar managing director David Coad said.
“They’re very focused on what they’re doing at Solomon. We will continue discussions but we will also review the other options that came out of the scoping study.”
When it comes to moving iron ore from out of the ground into the hungry steel mills of China, there is no short cut. But the riches generated by the likes of FMG and Atlas means companies will keep trying to find one.
