Iron ore: Rio Tinto launches Pilbara costs assault

It’s in the Pilbara that Rio’s group-wide assault on costs can be stepped up over the next couple of years.

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At the remote Cape Lambert iron ore port in the Pilbara in Western Australia, which effectively inspired BHP Billiton’s failed 2007 bid for Rio Tinto, things are quieter than they have been of late.

A construction workforce that spent the last two years building Rio a second iron ore jetty and associated port and rail infrastructure at a cost of more than $US10 billion ($14bn) has now finished, and Rio’s mine system has not been expanded to match the infrastructure capacity.

But it is here, 40km northeast of the industrial town of Karratha in the nation’s northwest that Rio’s group-wide assault on costs can be stepped up over the next couple of years as it battles BHP for the mantle of the world’s lowest cost iron ore producer.

There is not only the potential to reduce costs simply through increasing mine production to match the infrastructure capacity. There should be the opportunity to find new efficiencies and for Rio produce at a higher rate than the infrastructure capacity of 360 million tonnes a year to serve global iron ore demand that Rio expects to keep growing.

Rio iron ore chief Andrew Harding, who runs the nation’s biggest mining business, says the completion of the expansion means the chance to accelerate cost-cutting that has already driven costs (before shipping, royalty payments and sustaining capital) down to $US15.20 a tonne, from $US20.40 a year ago, helped by a falling Australian dollar.

“With the port and rail infrastructure now complete, we can concentrate on improving system-wide efficiency and productivity, rather than managing the demands of both construction and operations,” Mr Harding said.

On top of this, Rio’s big boom-time push into driverless trucks and trains is expected to keep it ahead of BHP on the cost front.

“Our first-mover advantage with new technology is providing us with a productivity edge that we do not see being bridged by others in the foreseeable future,” Mr Harding said.

BHP’s unsuccessful $US160bn bid for Rio eight years ago, and a subsequent friendly iron merger between the two that was quashed by regulators, was largely driven by a wish to access Rio’s port expansion options at Cape Lambert, which does not have the constraints of BHP’s Port Hedland harbour to the north-east. The appeal for Rio in a tie-up would have been BHP’s mines, which are closer to the coast and generally regarded as longer-life, meaning it does not have to spend as much on sustaining capital as Rio.

Rio has completed a $US14.7bn mine and infrastructure expansion to boost its Pilbara region iron ore capacity from 290 million tonnes a year to 360 million, and will need to spend more to get mine capacity to match its port and rail capacity.

Next year it plans to produce 335 million tonnes (including minority partners’ share) and in 2017 it aims produce 350 million.

And it is not until this happens that Rio will be able to really tell what new efficiencies can be squeezed out of its expanded system of iron ore mines, railways and ports.

This will put Rio’s ports at a similar stage BHP’s was in last year when it finished its infrastructure capacity expansion to 245 million tonnes. It is now targeting going up to 290 million tonnes through productivity gains and opening up existing bottlenecks.

While the potential gains are unlikely to be as big as those BHP iron ore boss Jimmy Wilson has eked out of BHP’s space constrained Port Hedland infrastructure that has been built up over decades, Mr Harding wants Rio’s system to produce more than its nameplate capacity. “We have not tested the system at 360 (million tonnes),” Mr Harding told analysts earlier this month.

“Theory would say there would be more capacity available, history would say the same thing, but there’s no way on earth I’m going to volunteer anything in advance until we’ve actually done all that test work, but have no doubt that we will actually be doing it.”

The coming production from Rio, along with expansions from Vale, Hancock Prospecting and BHP, will put further pressure on an iron ore price that has fallen from $US135 a tonne at the start of last year to around $US50. But the way Rio and BHP see it, they will still make good margins as the world’s lowest-cost producers and other miners will have to shut their higher-cost operations to make way.

Earlier this month, UBS analysts declared BHP’s total costs (including shipping, royalties and sustaining capital) had fallen to $US28 a tonne, for the first time beating Rio, at $US30, to be the world’s lowest-cost iron ore exporter to China.

But with Rio’s coming mine expansion and potential de-bottlenecking, Mr Wilson’s aim of cementing BHP as the lowest-cost iron ore producer is far from achieved.

Mr Harding did not acknowledge the widely reported UBS claim when he fronted analysts two days later. “We are the lowest cost producer and intend to ­remain in this position through the hundreds of initiatives we are pursuing,” he said.

Deutsche Bank estimates Rio can cut costs before shipping, sustaining capital and royalties to $US11 a tonne or $US12 by 2017.

The reporter travelled to the Pilbara as a guest of the WA Chamber of Minerals and Energy