From the most litigated mine in the world to Rio’s Pilbara silver bullet – Rhodes Ridge
Rio Tinto shareholders are going to be hearing a lot about the Rhodes Ridge iron ore mine over the next few years. Nick Evans looks at why the deposit is the new jewel in Rio’s Pilbara crown.
Lost in a legal wilderness for decades, Rhodes Ridge was once best known as the most heavily litigated mining deposit in the world. Now it is Rio Tinto’s headline project, the silver bullet that will help return its crown as the Pilbara’s most profitable miner.
At the peak of the last mining boom, Rhodes Ridge became almost a byword for some of the worst aspects of the West Australian mining industry.
Rhodes Ridge has long been regarded as the best iron ore deposit in the Pilbara. But for more than 17 years its development was stuck in legal limbo as the descendants of the legendary prospecting partnership between Lang Hancock and Peter Wright fought out a bitter battle for control of the project.
For many years Rio’s joint venture was held with both Hancock Prospecting and Wright Prospecting, but in 1997 the descendants of Wright launched legal action, claiming that the full half-share of the deposit should have been assigned to them rather than being split with Gina Rinehart’s family company.
For 17 years, Rhodes Ridge only made money for lawyers, until the High Court finally extinguished Hancock’s claim to a share of Rhodes Ridge in 2013.
Along the way it was caught up in another legal battle after upstart junior Cazaly Resources – backed by the bitter rival to both Rio and Hancock, Andrew Forrest’s Fortescue Metals – challenged Rio’s control of the deposits, arguing Rio and its partners had failed to make good on the promises contained in a 1972 state agreement that underpinned its development.
Cazaly eventually lost that case and, as iron ore prices plunged last decade, plans to develop Rhodes Ridge were returned to the shelf to gather dust.
Now, after the agreement with Wright Prospective was updated a year ago to a modern footing, Rhodes Ridge is back on the agenda as the silver bullet that will solve all Rio’s iron ore troubles.
BHP’s 2007 bid for a merger with Rio had behind it a simple premise – marry BHP’s massive mines to Rio’s massive port and rail infrastructure. It would have solved BHP’s problems at the cramped export centre of Port Hedlands, and removed the need for Rio to develop a slew of smaller mines scattered across the Pilbara. Regulators killed that dream off quickly – but not the underlying need for each company.
To this day, BHP is limited by the constraints at Port Hedland, and Rio has port and rail export capacity worth 360 million tonnes a year – and a network of 17 mines that can only deliver about 330 million tonnes.
Rhodes Ridge may be the best case for Rio to solve that issue.
At its final export capacity of about 100 million tonnes of iron ore a year, Rhodes Ridge will end Rio’s reliance on the scattered network of 17 mines across the Pilbara – needed for now to produce differing ore types that make up Rio’s flagship Pilbara Blend, but which have always cost more to develop and mine than those owned by BHP.
Since 2018 Rio has spent billions of dollars building a single new greenfield mine, the 43 million-tonne-a-year Gudai-Darri operation, and another three brownfield replacement projects across the rest of its Pilbara network – collectively worth 130 million tonnes a year of capacity, according to Goldman Sachs analyst Paul Young.
Over the next five years, Rio needs to win approvals for another five brownfield projects to meet its medium-term guidance of exporting 345-360 tonnes a year.
In the same period, BHP’s only major project has been South Flank, an 80 million-tonne-a-year mine – and part of the 145 million-tonne-a-year Mining Area C hub.
Add the 100 million tonnes from Rhodes Ridge to the 50 million tonnes or so produced at the Hope Downs operations – a joint venture with Hancock Prospecting – and Rio finally will have a regional hub to compete with the best of BHP’s offerings.
“We think the development of Rhodes Ridge has the potential to be significant for Rio’s Pilbara business as it could lift mine system capacity by 10 per cent greater than 360 million tonnes a year, utilise spare rail and port infrastructure and help close the greater than $US10 per tonne free cash flow gap with BHP to $US3-$US4 a tonne, or by more than 50 per cent by the end of the decade,” Mr Young said in a recent client note.
Rhodes Ridge contains 6.8 billion tonnes of iron ore at an average grade of 61.6 per cent iron, including 600 million tonnes of prized Brockman ore – which grades close to 64 per cent iron and is low in the critical impurity of phosphorous.
It is lower in grade than Rio’s half of the vaunted Simandou deposit in Guinea, where the resource grades an average 65.5 per cent iron – but twice the size, on current figures. More importantly, all of Rhodes Ridge can be serviced by Rio’s existing infrastructure – despite higher construction costs, Rhodes Ridge is likely to cost far less to develop.
The key deposits at Rhodes Ridge straddle Rio’s existing rail line running between the Hope Downs 1 and 4 mines – aside from a short line to a new processing plant and a few new passing loops on the existing line, on current thinking Rio won’t need to build any new rail infrastructure to get a mine up an running. And Rio owns and runs the entire rail and port network itself.
Although Wright Prospecting controls half of the project, so important is the ownership of the infrastructure that Barclay Bank analysts noted last week that Rio would effectively take a far larger share of the free cash flow from Rhodes Ridge – enough to keep its equity levels across its Pilbara network above 85 per cent.
“Rio highlighted its equity share of free cash flow will remain stable at above 85 per cent, in line with current levels – it has successfully compensated for lower equity volumes via the port and rail access fees and carried interest mine financing negotiated with Wright Prospecting,” Barclay analyst Amos Fletcher wrote.
The reporter recently travelled to the Pilbara as a guest of Rio Tinto
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