Victory A Long Way Down Pilbara Track

Sydney Morning Herald

Monday September 29, 2008

Jamie Freed jfreed@smh.com.au

IT HAS been more than four years since Andrew Forrest's Fortescue Metals first applied for the right to run its own trains down BHP Billiton's private railway lines in the Pilbara.

The first stage of the matter is not likely to be resolved until next year or 2010, after the Australian Competition Tribunal makes a ruling about BHP's Mt Newman line in particular. It will take even longer for Fortescue to receive an answer on BHP's Goldsworthy line and Rio Tinto's Hamersley and Robe River lines since that process was started three years later. But after a victory in the High Court last week, there is a growing view that it is only a matter of time before third parties are granted access to the Pilbara railway lines - at least in theory.

Whether any company will actually run their trains along those lines once practical considerations - available capacity and the price - are taken into account appears much more doubtful. At the very least, it could take years before Forrest's dream becomes a reality.

That is not to say that Fortescue's victories so far have been hollow. The company has challenged the 40-year status quo in the Pilbara and has made BHP and Rio more likely to accede to less onerous options such as haulage agreements and mine gate sales.

High-cost haulage

In July, Rio signed a landmark agreement with the Kerry Stokes-backedIron Ore Holdings to purchase, rail and ship up to 1.5 million tonnes of the junior miner's iron ore a year. It is questionable whether such a deal would have been signed if Fortescue had not applied for access to the incumbent players' Pilbara rail lines. Some saw the agreement with IOH as more of an olive branch to regulators than one that would benefit Rio.

Before signing up with Rio, IOH also held rail access talks with BHP. A few years back, BHP also discussed rail options with Gina Rinehart's Hancock Prospecting for the Hope Downs project. It's telling that once Hancock was presented with the potential bill, it decided to build its own railway (it later formed a joint venture with Rio).

The amount BHP and Rio are likely to charge for access or haulage could be so onerous that the Australian Competition and Consumer Commission will have to step in to mediate, adding even more time to the already laborious process. The primary aim of BHP's proposed merger with Rio is to take advantage of cost savings in the Pilbara by combining infrastructure. Opening the rail lines to third-party access would hardly boost the efficiency of the complex operations.

Line quandary

When it comes to accessing BHP's Mt Newman line to help Fortescue develop its small Mindy Mindy joint venture with the Ukrainian-owned Consolidated Minerals, Fortescue's executive director, Graeme Rowley, is a realist. He told The Drum Fortescue was unlikely to run its own locomotives along BHP's line to deliver Mindy Mindy ore to Port Hedland. Instead, Fortescue would probably use the leverage granted by third-party access to negotiate a haulage agreement with BHP.

But even haulage is not a simple matter. BHP, Rio and Fortescue all use different-sized ore cars. That means ore hauled in BHP's ore cars cannot be dumped at Fortescue's port since the expensive car dumpers can only operate on cars of Fortescue's size. That means Fortescue might have to provide BHP with its own ore cars to attach to BHP locomotives.

It is not only Fortescue which will run into this problem. If BHP's bid for Rio is successful, it will have to sort out the same issue if it wants to use the infrastructure efficiently.

Having already sunk a huge amount of money into building its own rail line from its Cloud Break mine to Port Hedland, Fortescue may not be the biggest beneficiary of its long-running railway battle with BHP and Rio. Sure, it may seek to use Rio's rail lines to develop its Solomon prospect in western Pilbara. But its project is so large it might be easier to simply extend its own line to the west.

Instead, companies like Atlas Iron, whose Pardoo project is right on BHP's Goldsworthy line, are likely to be the biggest winners from a third-party access regime.

"Should open access ultimately be granted, it could completely change the economics that have historically prohibited development and exploitation of small-scale, stranded iron ore deposits in the Pilbara," Macquarie Research Equities said after the court decision last week.

All of the members of the relatively new lobbying group, the North-West Iron Ore Alliance, could prove major beneficiaries of a new railway regime. Atlas is a member of the alliance, as are BC Iron, Brockman Resources and FerrAus. If Fortescue wins its case, more mine gate sales and haulage agreements with BHP and Rio - and Fortescue itself - will almost certainly occur. Outright takeovers are another possibility. That will benefit investors in a raft of companies, but possibly not those who have holdings in BHP and Rio.

© 2008 Sydney Morning Herald

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