BHP approves $4.5b South Flank iron ore mine in Western Australia

Source: The Australian Financial Review.
By: Peter Ker.

BHP has warned of rising cost pressures as it and Fortescue Metals Group push ahead with $6 billion of new iron ore projects in Western Australia, with the scramble for workers and equipment set to intensify should Pilbara rival Rio Tinto pull the trigger on its own expansion.

The BHP board approved $US2.9 billion ($3.8 billion) worth of spending on the South Flank iron ore project on Thursday evening, with costs set to rise to $US3.4 billion once contributions from partners Mitsui and Itochu are included.

South Flank looms as BHP’s biggest single project spend (excluding mergers and acquisitions) since it committed $US6.6 billion to the Jimblebar iron ore project in 2011, and the approval came barely three weeks after Fortescue announced it would spend $US1.27 billion on a new mine at Eliwana.

Rio Tinto is also expected to approve construction of a new mine at Koodaideri before the end of 2018, meaning Australia’s three biggest iron ore miners will be building mines in the same region at the exact same time.

The big miners have already reported rising cost inflation in recent months, but BHP’s Minerals Australia president Mike Henry pointed to $US184 million worth of early works spending that was approved for South Flank last year, and said he was confident that spending had given BHP the jump on its rivals.

“We have got a bit of a head start in terms of actually being able to get on to the tools relative to some of the other projects … we started work on this project after the board sanctioned some interim funding last year,” he said.

“I think we are going to see a bit of pressure in the market as a result of multiple projects being pursued at the same time, [but] I think we are pretty well positioned in the timing of our full sanction.”

Own pathway

Eliwana and South Flank will begin production in 2020 and 2021 respectively, while Koodaideri is expected to begin production in 2021 if approved by the Rio board.

Upon approving Eliwana last month, Fortescue chief executive Elizabeth Gaines said she had not placed any importance on starting construction before Rio and BHP.

“It is less about what is happening with others in the sector, but more around our own pathway, [but] it can’t hurt to be the first,” she said.

South Flank will produce 80 million tonnes of iron ore a year, which equates to almost one third of BHP’s current production in the Pilbara region.

Most of South Flank’s production will replace the volumes that will be lost when the Yandi mine reaches the end of its working life in the near future, but with Yandi producing about 65 million tonnes a year, it is clear that South Flank will also provide additional supply into the iron ore market and help BHP to reach its goal of exporting 290 million tonnes a year after 2019.

South Flank will run for 25 years and will improve BHP’s average iron grade from 61 per cent to 62 per cent while also increasing the proportion of lump iron ore produced by the company from 25 per cent to 35 per cent.

The increased grades and lump ratio will be important, given Chinese customers are increasingly paying premiums for higher grade and lump iron ore.

“We think it is going to be quite significant for the portfolio,” said Mr Henry, when asked what impact the improved grades would have on revenue.

Mr Henry said South Flank would create 2500 jobs during construction and “more than 600” ongoing jobs.

The latter number implies a reduction in the number of ongoing roles given Yandi employs more than 700 people, and BHP expects to eventually run automated trucks and autonomous drills at South Flank.

The approval comes less than two years after BHP warned that new projects like South Flank may not go ahead if royalties were raised on WA iron ore.

Those warnings were in response to a plan by the WA National Party to raise iron ore royalty rates, but that plan was ultimately defeated when its architect, Brendon Grylls, lost his seat in WA parliament.

South Flank will use existing infrastructure linked to BHP’s Mining Area C mine.

While the South Flank approval is a boost for the Western Australian economy, it is also a boost for mineral sands producer Iluka, which has a lucrative royalty stream on production at Mining Area C, which will extend to iron ore produced at South Flank.

Sandon Capital analyst Campbell Morgan said the size of South Flank was bigger, and therefore better for Iluka, than many had expected.

“At current prices and exchange rates the South Flank project alone will generate $2.25 billion in pre-tax cash flows for Iluka in the first 25 years of its life. This is on top of [about] $50 million per annum of royalty cash flows Iluka is currently receiving from existing production at Mining Area C,” he said.

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