BC Iron to Cut Costs as Iron Ore Prices Tumble

BC Iron to Cut Costs as Iron Ore Prices Tumble

Australia's smaller iron ore miners are struggling to keep their heads above water as the price of the steel-making commodity hits a fresh post-global financial crisis low.

The price of Australia's biggest export fell more than two per cent to $US52.90 overnight following a four per cent fall the previous day.

Junior and mid-tier miners are having to reassess their costs as the world's biggest iron ore miners continue flooding the market despite a softening in Chinese demand.

Morgan Ball, the chief executive of junior Pilbara producer BC Iron, says his company is planning more cost reductions after recently meeting with Chinese steel mills.

"Clearly there is a significant supply influx still to come primarily out of Vale and Roy Hill in the short-term and that's why we're setting our business up for a couple of years, but we think we can operate through that," Mr Ball told AAP.

"We have more costs to take out of the business that will help us through this period."

Mr Ball said there were no plans to make further cuts to staff as he keeps a close eye on how many Chinese domestic mines re-open after winter.

Still, there could be some support for the iron ore price after China's central bank eased restrictions on down-payments for second homes and cut taxes to boost its housing market.

"It all helps," Mr Ball said.

"I think we'll see more of those kind of initiatives."

He added that mills and traders in China, India and Indonesia would prefer to deal with more than two or three companies.

Fortescue Metal's chairman Andrew Forrest last week called for a cap on iron ore production, sparking an investigation by the competition watchdog the Australian Competition and Consumer Commission.

ACCC chairman Rod Sims will focus on cartel conduct in government procurement and in the commodities market, particularly iron ore in the year ahead.

"Mr Forrest has helpfully made that an important issue for us," Mr Sims told a business briefing in Perth.

"As someone who has been watching the mining industry for 40 years, I'm staggered that people don't realise that prices go up, people invest, production comes on, prices go down."

But he said it was hard to prove an attempt to illegally cap production.

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China’s Iron Ore Mines Keep Digging Despite Losses

About three-quarters of Chinese iron ore mines are in the red, according to remarks on Friday by Yang Jiasheng, chairman of the Metallurgical Mines Association of China, with operating rates as low as 20 per cent of capacity.

Shi Zhenglei, iron ore analyst at Mysteel, reckoned that about half of China’s estimated 1,500 iron mines would be forced to close this year, removing 20 to 30 per cent of national capacity. Many Chinese mines produce low grades of ore.

“Some miners will sell out, but the problem is that it will be hard to find buyers,” he said. “It is also difficult for state-owned companies to acquire small mines due to reasons pertaining to capital and local government.”

While many smaller, private iron ore miners may be willing to sell or at least mothball production, state-owned mines are locked into contracts with mills and may come under pressure to keep going.

Local governments also generally oppose closures that might raise local unemployment rolls. State-owned metals trader Minmetals, for example, has been unable to get permission to close a costly mine in northern China, in spite of the availability of cheaper imported ore.

“Many of the iron ore mines have signed contracts with steel factories,” said Wang Lin, analyst at Lange Steel Information Resource Center in Beijing. “Many are still operating because they want to make sure they have stable supplies for steel factories.”

The drop in prices has also hit higher-cost international miners including Australia’s Fortescue Metals Group, once hailed by the Chinese for its potential to break the market dominance of BHP Billiton and Rio. Andrew “Twiggy” Forrest, Fortescue founder and chairman, this week called for a cap to help revive prices.

China’s flagship steel producer Baosteel has joined Rio Tinto in rejecting that suggestion.

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BHP Reveals Dividend and Debt Plan for South32

The new entity will also be given $US2.2 billion of BHP Billiton's debt, in keeping with the company's promise to ensure the new company begins its life with a small and manageable debt load. Photo: Reuters

The company that will be spun out of BHP Billiton later this year will return at least 40 per cent of its underlying earnings to shareholders in the form of dividends, according to information on the demerger revealed this morning.

Dubbed South32, the new entity will begin its life with about $US2.2 billion ($2.9 billion) of balance sheet items, in keeping with the company's promise to ensure the new company begins its life with a small and manageable debt load.


About $US1.5 billion of that will be closure and rehabilitation provisions, along with $US674 million of net debt.

Some of BHP's biggest shareholders had urged the miner to give South32 no more than $US1 billion of net debt, so the details announced today were welcomed by institutional investors.

Australian Foundation Investment Company is the eleventh biggest holder of BHP's Australian stock, and managing director Ross Barker praised the low debt levels.

"That is a good thing, those resources (bound for South32) are fairly volatile so you wouldn't want a large debt on a potentially volatile company," he said.

"We are encouraged to see a 40 per cent dividend payout policy too ... on top of the fact BHP will be keeping their progressive dividend."

BHP shares were 25 cents higher at $29.65 around midday.

The man who will serve as South32's first chief executive, Graham Kerr, said the low debt levels were very important given the current market conditions.

"One thing the market often underestimates is the impact and the risk that comes with leverage, we have really thought deeply about what the balance sheet of South32 should be and we think it is at the appropriate level to allow us to fulfill the strategic priorities we think are important," he said. 

RBC Capital Markets analyst Chris Drew said the total liabilities were "in line" with the guidance from BHP.

"It is a very manageable balance sheet. The targeted payout ratio of 40 per cent is also within the range the market was anticipating," he said.

BHP's net debt will reduce slightly as a result, and BHP chairman Jac Nasser urged shareholders to vote in favour of the demerger in May.

"Having assessed a number of alternatives, the BHP Billiton board considers the demerger to be the preferred approach to achieving simplification of our portfolio and maximising shareholder value. The board unanimously recommends that shareholders vote in favour of the demerger," he said in a statement.

BHP was unable to confirm how the new company would manage its franking credit balance, saying only that South32 would distribute its dividends with the "maximum practicable franking credits".

South32 is expected to list on the ASX, the London Stock Exchange and the Johannesburg Stock Exchange before the end of the financial year, and BHP has hinted it will be primed to pursue investment and acquisition opportunities almost immediately.

The new company will start life with a $US1.5 billion revolving syndicated bank facility to ensure liquidity.

When asked about what sort of new investments South32 would be interested in, Mr Kerr said the company had to crawl before it walk, and walk before it could run.

The 11 operating assets bound for South 32 include the coal mines of Illawarra and South Africa, the manganese assets strewn across the southern hemisphere, the Cerro Matoso nickel mine in Colombia, the aluminium division and the Cannington silver, lead and zinc mine in Queensland. 

BHP estimates those assets would have generated a combined $US8.3 billion of revenue in the 2014 financial year, and would have been cash generative over the past three years.

RBC speculated recently that the demerger was a good idea, but was increasingly poorly-timed given the price collapse in some of BHP's major commodities.

But BHP chief executive Andrew Mackenzie said on Tuesday that productivity measures were more important during times of weak commodity prices.

"I can't think of a better time to do this transaction," he said.


In a recent interview, Colonial First State Global Asset Management resources portfolio manager Todd Warren said he believed the demerger still made sense despite the fall in commodity prices.

"The South32 business is much more non-OECD in its concentration and certainly does require a greater percentage of management time, so from that perspective only you can argue its a positive for BHP to simplify its business to more simple businesses to manage," he said.

Shareholders will get a chance to vote on the demerger plan on May 6.

The demerger will require $US738 million of one-off costs, such as stamp duty and fees to investment bankers such as Goldman Sachs, but Mr Mackenzie said that was "good value for money from a superb cast of advisors" whose efforts had been "herculean".

The likes of KPMG, Grant Samuel, Herbert Smith Freehills and Ernst & Young also played advisory roles on the mammoth demerger task.

In documents published today, BHP said those one-off costs would be paid back very quickly.

"We expect the value of the cost savings arising from portfolio simplification alone to more than offset the demerger's one-off transaction costs," the company said.

Beyond the demerger, BHP has today revealed a plan to cut its pre-tax cost base by a further $US100 million, with 90 per cent of the task to be complete by June 30, 2017. 

BHP Defends Iron Strategy as Good for Australia Amid Surplus

BHP Defends Iron Strategy as Good for Australia Amid Surplus


BHP Billiton Ltd., the world’s largest mining company, defended its strategy of boosting iron ore supplies at a time of falling prices, saying a focus on raising output and efficiency was aiding Australia’s competitiveness.

Production from its operations in Western Australia was a record 124 million metric tons in the first half, and may reach 245 million tons in the 2015 financial year, BHP said in a statement on Tuesday as Jimmy Wilson, head of its iron ore business, addressed a conference in Perth. The company is on track to achieve unit cash costs below $20 a ton, BHP said.

“With this strategy, we are maintaining Australia’s competitive position in the global market and providing the revenue, royalties, employment and innovation that is so important for this country’s future,” said Wilson.

Iron ore sank 47 percent in 2014 and extended losses this year as surging low-cost supplies from BHP, Rio Tinto Group and Fortescue Metals Group Ltd., Australia’s top producers, outpaced demand growth, spurring a surplus just as China slowed. The slump hurt government revenues in Australia, the world’s biggest shipper, while squeezing smaller producers. Iron ore may find a floor at about $50 a ton, Citigroup Inc. told the conference.

“We have no major projects in execution and our growth pathway will be achieved by continuing to make our existing infrastructure more productive,” said Wilson. BHP anticipated the increased supply of seaborne ore and approved the last of its major capital investments in the Pilbara in 2011, it said.

Lower Prices

Ore with 62 percent content at Qingdao fell 1.5 percent to $58.58 a dry ton on Monday, declining for a fifth day, according to data from Metal Bulletin Ltd. That’s the lowest price since at least May 2008, when Metal Bulletin started compiling weekly prices. The commodity is 18 percent lower this year.

“Is there any chance the major producers will reassess and downgrade their plans, given where the price is? We think not,” Laura Brooks, a senior consultant at CRU Group, told the conference. “One reason for this is that competitive pressure is driving producers to seek cost reductions, and volume is critical if unit costs are to be cut.”

Rio Chief Executive Officer Sam Walsh said last month that if his company reduced output, forfeited supply would be made up by higher-cost competitors, adding that producers made decisions independently. The London-based company, which mines in the ore-rich Pilbara region, is on track to deliver 330 million tons of output by 2015 and 350 million tons by 2017, Iron Ore Chief Executive Andrew Harding said at the at conference.

Rio’s View

“The broader Pilbara shows that from January 2011 to December 2014 inclusive, 248 million new tons entered the market from Rio Tinto, BHP Billiton and FMG,” Harding said. Of that increase, “Rio Tinto accounted for 63 million tons, or 25 percent. As you know, some would like you to believe that Rio Tinto has had the largest volume increase in that time. But as you can see, this is simply not the case.”

The global surplus will surge to 437 million tons in 2018 from 184 million tons this year, Morgan Stanley said on Feb. 22. Global seaborne supply is projected to increase 4.6 percent in 2015, topping the 3 percent growth in demand, according to the bank, which sees iron ore averaging $79 a ton this year.

There’s a floor for prices at about $50 a ton, Citigroup Iron Ore & Steel Head Mark Lyons said at the conference. At current prices, an estimated 38 percent of global output isn’t generating cash, according to CRU

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