Tuesday, April 13, 2010

Chinese Quest for Resources Making Billionaires of Some Australians

Quite a fascinating story on Bloomberg ... right place, right time, right land ownership - and you too can make hedge fund type of wealth.   [Jun 13, 2009: Australia in Perfect Position Aside China, but at a Cost?] On a broader scale, this once more shows China's very long term planning - just as they partnering with countries in Africa (we'll build out your infrastructure in return for access to natural resources) [May 13, 2009: Commodities - It's China's World: We Just Live in It] , the country obviously does not like the oligarchy of the major miners (VALE, BHP, RTP) and is essentially trying to create their own (Chinese backed) competitors... it will take many years, even if successful. [Dec 15, 2009: China's Economic Power Unsettles Neighbors]
  • Zeljko Zaic, a leathery-skinned surveyor at a Chinese- backed mining company, stands atop a sun-scorched ridge in the Australian Outback and kicks a lump of red iron ore lying on the trail.   “One day soon this will be part of someone’s house in China,” he says. 
  • In only five months, this 1,900-square-kilometer (734- square-mile) stretch of semidesert and salt lakes in the midwestern region of Western Australia has been transformed from a desolate habitat for kangaroos and bush flies into a base for the next wave of the nation’s mining boom.  Australia’s Gindalbie Metals Ltd. has joined with China’s Anshan Iron & Steel Group to build a A$1.8 billion ($1.65 billion) iron ore mine. The project includes a nine-story processing plant, a township of air-conditioned homes and a pub, restaurant and cricket pitch for 1,500 workers
  • Fueled by China’s appetite for minerals, about 50 publicly traded mining companies, many with market caps of less than A$2 billion, are spreading out mostly in Western Australia, a region four times the size of Texas with a population of just 2.2 million. Chinese investors, mainly state-owned steelmakers, have funded at least 20 of these outfits as part of Beijing’s move to reduce its dependence on Melbourne-based BHP Billiton Ltd., the world’s biggest miner, and Rio Tinto Group, the No. 2 iron ore exporter. 
  • The shares of eight Chinese-backed iron ore companies skyrocketed as much as 15-fold from 2005 to 2010, turning a handful of entrepreneurs into actual or aspiring billionaires. “It’s been life changing for some of these people,” says Tim Schroeders, who helps manage $1 billion, including mining shares, at Pengana Capital Ltd. in Melbourne. “It would have been a pipe dream 10 years ago to think you could compete with the world’s biggest mining companies.” 
  • “China is giving us the ride of our lives,” says Colin Barnett, premier of Western Australia. “There are risks and uncertainties, but it’s a ride we have got to take.”  
  • The Chinese government asks its companies to acquire strategic natural resources,” says Deng Qilin, general manager of Wuhan Iron & Steel Group Corp., which invested in two small Australian mining companies in 2008. “We are not saying we must take a controlling stake. We like any form of investment so long as we get the resources.” 
  • Last year, state-owned Hunan Valin Iron & Steel Group paid A$1.3 billion for a 17.3 percent stake in Fortescue Metals Group Ltd. The company was founded in 2003 by Andrew “Twiggy” Forrest, 48, who grew up on an Outback cattle ranch as the great-grandnephew of a 19th-century Western Australian explorer and state premier. Perth-based Fortescue, which makes almost all of its revenue from exports to China, earned A$508 million in the year ended in June 2009.  Forrest’s worth grew to at least A$4.7 billion as his company’s shares soared 1,200 percent in the five years from March 2005, giving it a market cap of A$14.8 billion. 
  • Forrest told Bloomberg Television on March 19 that he was studying plans to raise as much as $8.9 billion to help lift annual production to an eventual 260 million tons from the present 40 million. Four days later, Forrest told a conference in Perth that Fortescue was prepared to sell stakes of more than 50 percent in some of its lower grade iron ore projects in Western Australia to overseas steel mills. These projects include a joint venture with Baosteel Group Corp., China’s second-largest steelmaker, that the company said is about to begin. 
  • Paul Kopejtka has both battled and collaborated with Chinese investors. A coal miner’s son from Western Australia, Kopejtka, 42, earned a chemical engineering degree from Perth’s Curtin University before founding Murchison Metals Ltd. in 2004 and selling shares a year later. In 2009, Sinosteel Corp., China’s biggest iron ore trader, outflanked Murchison in its bid to buy Midwest Corp. Sinosteel paid A$1.4 billion in a hostile takeover of Midwest.  “It’s like a big chessboard, and everyone is jockeying for position,” says Kopejtka, who aspires to become a billionaire. Shares of Perth-based Murchison have soared 12-fold to A$2.65 since March 2005, making Kopejtka worth A$60 million. 
  • Clive Palmer, 56, a law school dropout, became a billionaire investing in real estate and mining. This year, he plans to sell shares in his Brisbane, Queensland-based Resourcehouse Ltd., a company with iron ore and coal reserves. Palmer hopes to raise $3 billion -- highlighting how the rewards of doing business with China have so far exceeded the risks entailed in riding the dragon. 
  • Six Chinese companies and their Australian partners are also setting up operations in the midwestern region, a new, mostly magnetite-mining frontier in Western Australia 1,000 kilometers south of the Pilbara. In the midwest, Karara Mining Ltd., the joint venture between Perth-based Gindalbie Metals and Anshan Iron & Steel, aims to start mining hematite and magnetite beginning next year. Unskilled workers can earn with overtime as much as A$140,000 a year. Foremen can make A$200,000.  “Thank God for China,” says Dionne Drew, 43, a Karara safety officer. “Where would we be without them?”

Aside from the Malthusian (potential) risks [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012], China also does not like the control these mining companies have to set prices....
  • Australia is China’s top supplier of iron ore, providing it with 43 percent of its imports, according to data compiled by Bloomberg. BHP and Rio Tinto control more than 80 percent of the Australia-China iron ore trade.    Iron ore spot prices more than doubled to $147.50 a metric ton on March 25 from a year earlier, according to the Steel Index.
  • Smaller companies face huge hurdles in competing against the mining giants. BHP and Rio Tinto, who trace their history back more than 100 years, occupy the best mining leases in the Pilbara. The hematite ore they mine needs only to be crushed before being loaded onto trains and ships. When the ore gets to China, it can often be fed directly into steelmaking furnaces without processing. 
  • BHP and Rio Tinto have another advantage: In the Outback, where there are few roads and train tracks, the mining giants built their own railway and port for their exclusive use.   In 2008, Fortescue became the first of the smaller iron ore mining companies to construct its own rails and port after spending five years and part of A$2.8 billion on the project.
  • Smaller companies are at a disadvantage because many of the remaining mining leases are for lower-grade ore, including magnetite. It contains less iron than hematite and needs more costly processing
  • Citic Pacific Ltd., the Hong Kong unit of China’s biggest state-owned investment company, paid $200 million to Australian entrepreneur Clive Palmer for the rights to mine 1 billion metric tons of magnetite. Citic is now spending a total of $4 billion on several projects, including a 450-megawatt power station to process 28 million tons of the iron ore annually. The company also has to construct a 51-gigaliter (13.5 billion- gallon) desalination plant and a 25-kilometer (15.5-mile) slurry pipeline to transport the processed ore from the mills to a custom-built port. 

End game?
  • China is positioning itself to play a major role in the next generation of iron ore miners,” says Hambling, who helps manage $300 million. “In 5 or 10 years, I don’t think Rio Tinto or BHP will be in as commanding a position as they are in now. There will be a fourth and fifth force in mining.”
And making some billionaires along the way....

    [Oct 14, 2009: Finacial Post - Australia Still Hopping]
    [Nov 11, 2009: China Continues Expanding "Infrastructure for Resources" Policy with Agreement in Malaysia]

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