China help sought for iron ore mine

SYDNEY - Mining entrepreneur Andrew "Twiggy" Forrest won fame in the 1990s by convincing investors to pour almost US$1 billion ($1.41 billion) into the Australian outback with the promise of gleaning nickel from worthless clay-like ore.

Ten years later, Forrest is back - this time trying to persuade Chinese companies to help underwrite a A$1.85 billion iron ore mine run by his Fortescue Metals Group in the vast Pilbara region of far Western Australia.

In the process, Forrest is posing a challenge to two of the world's biggest mining houses - BHP Billiton and Rio Tinto.

Sceptics had insisted that Forrest's last project, Anaconda Nickel, would never work. Today that venture, renamed Minara Resources, is running to schedule - but only after injecting hundreds of millions of dollars and suffering one of Australia's biggest losses.

This time, Forrest faces a less complex but equally challenging task. Fortescue holds property rights covering 44,000sq km and enough ore to mine for at least 20 years. But it must build a mine, construct a 400km rail line from the remote Chichester Ranges and dredge up a port.

Fortescue expects to start delivering ore in 2007, producing up to 45 million tonnes a year, with sales topping A$1 billion, says Forrest, about half what Rio and BHP Billiton each earn.

Fortescue has signed contracts with Chinese steel makers and Government agencies promising long-term contracts, as well as money or technical support. But so far, the company has commitments for less than 4 per cent of Forrest's A$1.85 billion goal.

China's interest in Fortescue reflects surging domestic economic growth, which has turned iron ore and other raw materials into precious commodities.

Iron ore mining is a low-margin, high-cost business, where hundreds of millions of tonnes of material must be dug up and sent to distant ports for shipment to the giant steel-making mills of Japan, Korea, Taiwan and, increasingly, China.

Much of the ore in the Pilbara - the world's single largest deposit - is exported to Japan by BHP and Rio Tinto, which have their own railways and ports but refuse to share them.

But investor optimism surged on news of Fortescue's Chinese contracts, propelling shares to an all-time high of A$3.33 in November, a five-fold rise in two months. Its market capitalisation of A$480 million rests on hopes that it can drum up enough capital to start operations in 2007.

The stock has since pulled back about A$1 a share, trading around A$2.33.

Stockbroker Patersons suggests annual earnings could reach A$400 million but still rates Fortescue a speculative buy.

Analysts say establishing a third force in the Pilbara may be easier said than done, given the lack of roads and rail lines and the entrenched interests of the mining giants.

Forrest says that most of the cost of the project will be shouldered by Chinese firms.

Since June, Fortescue has raised A$14.5 million in new capital via two share placements and signed sales agreements with Chinese steelmakers that contain prepayment commitments totalling A$66 million.

China's Hebei Wenfeng Iron & Steel has agreed to buy two million tonnes of ore a year from Fortescue, while other supply pacts have been signed with Jiangsu Fengli and Ping Xiang Iron & Steel to supply six million tonnes a year for at least 20 years.

But Fortescue's bigger rivals can afford to sell more ore for less money, say analysts, if that's what it takes to hold on to customers when the commodity cycle shifts.

This year alone, BHP Billiton has locked in US$9 billion in new iron ore sales with China and is spending more than US$1 billion to expand its mines, while Rio Tinto, with new contracts for 40 million tonnes of ore, will spend about the same.

Analysts also question the richness of Fortescue's ore.

Forrest insists China wants more than just ore from the Pilbara, betting that competition will mean more players and lower prices as it eyes long-term supply pacts.

"China is looking for not only new iron ore deposits, but infrastructure that can completely open up the world's largest iron ore region to competition," Forrest says.

- REUTERS