10/2/2015

5:23AM

Bigminersplayingthecostcurve
FridayOct2,2015

6385onlinenow

Doyouknowmoreaboutastory?

RealEstate

Cars

Jobs

Dating

Newsletters

FairfaxMediaNetwork

Bigminersplayingthecostcurve
Readlater

November30,2012

MalcolmMaiden
Columnist

ViewmorearticlesfromMalcolmMaiden
FollowMalcolmonTwitter

EmailMalcolm

submittoreddit
Emailarticle

Print

Reprints&permissions

ITWOULDhavebeenabitmorethansheercoincidenceyesterdaythatRioTintochiefexecutiveTom
AlbaneseandhistopexecutivesbookendedBHPBilliton'sannualmeetingwithamorningmedia
briefingandanafternoonupdateforanalysts.
There'smutualrespectofthekindsuperstarsinanyarenaoftenhaveforeachother,butthere's
intenserivalrytoo.Theyarechasingthesameinvestors,afterallandwhattheyhadtosayyesterday
underlinednotonlytheirmutualstrengths,butpointsofdifference.
BHPhasbeenbothaminerandanupstreamoilandgasplayersince1966,whenitfoundoilinBass
Strait.Itspitchtoinvestorsisthatitoffersstablegrowth.RioTintoisapureminer,andamuchheavier
puntononecommodityironore.
Bothgroupssaytheirindustryismovingfromamultiyearboomwheredemandoverwhelmedsupply
andpushedpricestorecordhighsintoaperiodinwhichdemandislessfeverishasChina'sgrowth
slows,andpricesarealsolower,becausemineproductionisrisinginalaggedresponsetorecord
prices.
Theybothallowedincreasesindevelopmentcostsandoperatingcostsduringtheboomthattheyare
nowsayingtheywanttowindback,andtheyarebothbeinghurtbystrongcurrenciesinthecountries
theyoperateinandhigherroyalties.
It'satougherenvironment,onethatBHPchiefexecutiveMariusKlopperstoldshareholdersyesterday
wouldhitcommoditiesthatstarredintheboomhardestasprices''meanrevert''thatis,fallback
towardslongtermaverages.

'IronoreisstillveryprofitableforRio,andslightlyless
forBHP.'

Kloppershoweveronceagainadded(andnodoubtcouldevenifheweresleepwalking)thatthenewenvironmentplayedintothehandsofcompanies
that''sitatthelowendofthecostcurve,whoareabletoexpandproductioninatimelyanddisciplinedfashion,andwhocaninvestintherightportfolioof
commodities.''BHPisoneofthosecompanies,orcourse.RioTintoisanother.
InitsbriefingyesterdayRiosetoutinblackandwhiteforthefirsttimejusthowgooditsironorebusinessinWesternAustralia'sPilbararegionis.
Thegroup'sironorechiefexecutiveSamWalshsaidRio'scashcostofproductioninthePilbarawas$US24.50atonneinthefirsthalfofthisyear.The
allincostpertonnetodelivertoChinaincludingroyalties,shippingandunderlyingcapitalcostswas$US47atonne.
ThatmeansthatironoreisstillveryprofitableforRio,andonlyslightlylessprofitableforBHP,whichhasacostbaseinthePilbarathatisonlyafew
dollarsatonnehigherthanRio's,andstillrightatthebottomoftheglobalironorecostcurve.
Theironorepricefellfromahighof$US191.90atonneinFebruarylastyeartoalowof$US86.70atonneearlyinSeptember.IthititslowsasChinese
ironorestockswererundown,andastheyhavebeenrebuiltthepricehasrebounded,to$US122.80atonneinmidNovemberand$US117.90atonne
onThursday.
ThisreboundifmaintainedwillcarrymoremarginalAustralianironoreproducers,includingFortescue,backintothegame.Asaruleofthumb,they
need$US100atonneormore.RioandBHPontheotherhandwerestillsolidlyprofitableat$US86.70atonne,andatcurrentironorepricesarestill
bookingwhatbyotherindustrystandardsaresuperprofits.
Withalmosthalfofits$US27.8billiontotalrevenuecomingfromironoreinthefirsthalfofthisyear,Rioistheheavierpuntonthecommodityandits
http://www.smh.com.au/business/bigminersplayingthecostcurve201211292ainf.html

1/2

10/2/2015

Bigminersplayingthecostcurve

pricerecovery.Itsprofitistiedtightlytomovementsinboththeironorepriceandtheunderlyingcostofironoreproduction.
BHP'sironoreweightingislower.Itsironorerevenueof$US22.6billionintheyeartoJunewas31percentoftotalrevenue.Itspetroleumdivisionis,
however,uniqueamongtheheavyweightminersandalmostaslarge,withrevenueofalmost$US13billionintheJuneyear.It'salsohighlyprofitable,
retaining49inthedollarofrevenueasearningsbeforeinterestandtaxcomparedwith63intheironorebusiness.Thegapwillprobablynarrowthis
yearasBHP'saverageironpricefallscomparedwith20112012.
ThecontributionbothironorebusinessesmakedependssubstantiallyonwhatsortofeconomicgrowthBeijingengineersnextyear.MariusKloppers
saidyesterdaythatBHPexpectedChina'sGDPgrowthtorangebetween7percentand8percentincomingyears,downfromarunrateof10per
centplusduringtheboom.Rio'sTomAlbanesewasabitmorebullish,predictinggrowthabove8percentnextyear.
Italsodependsonhowquicklynewironproductioncomesonstream,(BHP'sdecisiontodelaytheexpansionofitsPortHedlandexportportinthe
Pilbarawillkeepsuppliestighterandpricesstrongerinthemediumterm),theextenttowhichChineseironoreproductionfallsinthenorthern
hemispherewinter,andonwhetherornotproductionhereishurtbycyclonesduringthesummer.
Rio'sheavierweightinginthecommoditywillbealiabilityoranassetdependingonhowtheseissuesplayoutbutthegroupalsorevealedsomevery
interestingcostreductiontargetsyesterday.
ItannouncedthatitwasboostingtheexistingcapacityofitsPilbaraoperationfrom230milliontonnesto237milliontonnes,andasaresultboostingits
expansiontargetfrom353milliontonnesayearto360milliontonnesayearby2016.
Theincreaseistechnologydriven,andSamWalshtoldinvestorsyesterdaythatRio'sindustryleadingmineautomationtechnologyandotheradvances
wouldallowRiotohitthe2016productiontargetwith16percentor900fewerpeoplethanitwouldotherwiseneedtoemploy.
Healsosaidthatasproductivitygainsarebooked,Rio'sallinminingcostsshouldfallfromanalreadyverylow$US47atonnetoaround$US35.50a
tonneby2020.BothgroupshavewonderfulbusinessesinthePilbara,butRiodoesseemtohavetheedge.
mmaiden@fairfaxmedia.com.au

Recommended

PromotedStories

JarrydHayneshowsoffhisstunningbody
Sport

BypassingProbatewithBeneficiaryDesignations
For
Dummies.com

FormerODPPsolicitorLisaMunroavoidsjailtime
for

10TopOptionStrategiesForDummies
Dummies.com

NSW

RussWithersresignsfrom7Elevenboard,CEO
Warren

GoodyearTire:OutstandingTurnaround,Decent
Buy

Business

TalkMarkets

Goodvaluehomesin
Sydneyforlessthan$1.5
million

USEconomicGrowth:TheLastLineOfDefense
TalkMarkets

Domain

Sydney'sBBQKingon
themove

5Lakhto1Crorein10years
scripbox

GoodFood

Recommendedby

submittoreddit
Emailarticle

Print

Reprints&permissions

http://www.smh.com.au/business/bigminersplayingthecostcurve201211292ainf.html

2/2