FYI, article in todays The Australian.Colin Barnett risks West...

FYI, article in todays The Australian.


Colin Barnett risks West Australia's iron-ore program
Bryan Frith | February 12, 2009
The Australian

IN refusing to consider a $2billion proposal to fast-track the development of WA's mid-west iron ore region, the state Premier Colin Barnett risks inflaming feelings in Beijing that he is favouring Japanese interests over Chinese concerns.

The previous WA Labor government last year awarded preferred tenderer status to Oakajee Port & Rail (OPR), which is owned 50-50 per cent Japan's Mitsubishi and iron ore hopeful Murchison Metals, to develop a $1.5 billion deepwater port at Oakajee, north of Geraldton.

OPR got the nod ahead of a rival tender from Yilgarn Infrastructure, which is owned 50 per cent by five Chinese state-owned concerns and has $3 billion of debt funding essentially committed by China's Exim Bank. The other 50 per cent of the equity is held by Australian investors.

OPR and Yilgarn are now vying for the contract to build a $2 billion open access rail line from the mid-west to Oakajee to enable the mid-west iron ore mines to be developed. While the two projects are separate they are dependent upon each other. The mines cannot be developed unless there is an infrastructure to take their output to export markets, and without the rail line the new port cannot be justified.

Yilgarn this week came up with an innovative proposal to bring the development of the rail line and iron ore mines forward by at least three years. This would involve interim measures to enable the iron ore to be exported from Geraldton until Oakajee is operationally available. The proposal would involve stockpiling ore about 15km from Geraldton, and transporting it to the port via a covered conveyor system.

That would enable the early development of the Midwest and Golden West mines, which together would produce 25 million tonnes of ore per annum, with ramp-up commencing in 2011. It would generate cash flow for the mines, ensure immediate product for Oakajee as soon as it comes into operation, generate 2200 jobs during construction and 140 permanent jobs for rail alone, and produce royalties during the interim shipping period of at least $80 million a year for the state government.

Yet Barnett has refused to countenance Yilgarn's proposal, stating that the Government would deal solely with OPR as it had won the tender to develop the port and rail line, and accusing Yilgarn of trying to "change the rules" and to circumvent the tender.

Now the problem with that is that the tender was only for the Oakajee port and not for the port and rail line. Both are able to pitch for the rail line, in fact have the right to build and operate separate rail lines from the mines to Oakajee, but the economics don't support duplication.

OPR has conceded that winning the tender did not give it exclusive rights to also develop the rail line, but contends that it "fully intends" to do so; well, so does Yilgarn.

It's Barnett not Yilgarn who is changing the rules, and it's not the first time he has done it in relation to this project.

Last October, as the global financial system began to unravel, Barnett suddenly decided that the WA Government would take over the development of the common user infrastructure of the Oakajee port -- such as deepening the channel, building the breakwater and the turning basin. Barnett proposed to commit $250 million of state funds and wants the Commonwealth to come to the party with a further $250 million, which would leave OPR having to fund only 35 million tonnes a year loading berth and the rail facilities at the port.

It's unclear why Barnett wants to take this action because OPR was to be required to build the common user infrastructure and then hand them back to the WA Government to be operated by the Geraldton Port Authority. Moreover, OPR has stated that it is able to fully fund the common user infrastructure.

Barnett's proposed action would turn the Oakajee port from a fully fund private project into a public private partnership, and would transfer the higher risk component of the project from OPR to the Government and the taxpayers. Yilgarn was not provided the opportunity to tender on that basis. Moreover, Yilgarn was supposed to be declared the reserve tenderer, giving it first right to construct a second 35mtpa loading berth. The WA Government has reneged on that appointment and although Yilgarn still has the right to build a second berth, it does not have a right of first refusal.

Chinese concerns have invested significantly in the mid-west region. Sinosteel acquired Midwest through a hostile $1.47 billion takeover, defeating an attempt by Murchison to merge the two companies, while Anshan Iron & Steel is increasing its stake in Gindalbie Metals from 12 per cent to 36 per cent. Sinosteel and Anshan are both equity shareholders in Yilgarn. Shougang has also secured 40 per cent of Mt Gibson Iron Ore, another potential customer of the mid-west rail line.

Moreover, Yilgarn has entered into foundation customer agreements with Midwest and Gindalbie to rail and ship 30mtpa of iron ore and also has a foundation-customer agreement with Golden West. Such commitments are necessary to justify the development of a rail line.

In contrast, OPR at this stage only has Murchison, which had been targeting a 25mtpa mine at Jack Hills. But drilling to date has only turned 96 million tonnes of direct shipping hematite ore. Murchsion says it also has 1billion tonnes of magnetite, which would need to be beneficiated, but that's only half the magnetite reserves of Gindalbie and its lower grade. Moreover development of Gindalbie's Karara project is poised to get under way.

OPR is hopeful that Gindalbie and Golden West will defect from Yilgarn and become foundation customers but that remains to be seen.

Barnett has claimed that the level of Chinese investment in mid-west iron ore companies justified seeking federal funds for the Oakajee port, and that he believed there was a need for stronger government involvement in the way the port was developed.

Barnett plainly is uneasy at the extent of Chinese investment in resource projects in WA. He has claimed that the Japanese had "played by the rules of the game" when they invested in WA in the 1960s and 1970's , taking small quality stakes in mining companies, but that state-owned Chinese companies pursuing WA miners were "slightly different scenarios".

He has also said that while he welcomed Chinese investment it was important to get it right, adding that Australia had more work to do to "get it in a stable, understood, trusting way".

Interestingly, Barnett is off to Tokyo next week, aiming to "smooth over" relations with Japanese business and political leaders but doesn't plan to visit China until the second half of the year.

While OPR may have the funds to develop the port, that's not yet the case for the rail line. There are suggestions that OPR has been to China seeking funds, to date without success. The Chinese want to participate in the rail line so that they can have an influence over controlling the costs of the infrastructure, and they are not interested in subcontracting the carriage of their iron ore.

If the WA Government maintains its stance of refusing to even talk to Yilgarn the Chinese have the option, in the current market conditions for iron ore, of doing nothing and delay indefinitely the development of the mid-west -- the mines, rail and port.

A compromise may need to be found, such as allowing OPR to build the port, and Yilgarn the rail line, and for the two companies to form a joint venture over the top which would be responsible for ensuring the infrastructure operated as an integrated unit.