Iron ore chauffeurs

YOU know iron ore is hot when a limousine company tries to roll over a couple of Pilbara wannabes. But what is the latest Chinese interloper driving at? The Metal Detective by Stephen Bell

Hong Kong-based Wah Nam International achieved several firsts last week when it unveiled separate scrip bids for Brockman Resources and FerrAus. It wins a prize for corporate diversification.
Wah Nam does own a copper mine in southern China, but its core business seems to be offering limousine and coach services from Hong Kong airport.
So a multi-billion dollar plunge into Western Australian iron ore mining and infrastructure is a bit of a U-turn.
Another first is the volume of paper involved in the bid.
Wah Nam has 3.9 billion shares on issue, valuing the company at $6.7 billion Hong Kong dollars, or $A870 million.
According to its offer document, it may have to issue up to 4.5 billion more shares if all options in Brockman and FerrAus are exercised and the offers succeed.
The notional $1.2 billion bid value is way more than Wah Nam’s current market capitalisation.
Yet the company talks confidently about consolidating Brockman’s and FerrAus’ projects and potentially building a transport corridor to Port Hedland.
It is a much bigger cab ride than the Wah Nam chauffeurs are used to.
A ride in a Mercedes Benz limousine from Hong Kong airport to Kowloon Bay, a distance of roughly 40 kilometres, will set you back $100.
It is around 300km from Brockman’s Marillana deposit to Port Hedland and the tab for a new railway is $3-4 billion – pretty big money for a small conglomerate.
The Metal Detective can only assume Wah Nam is a stalking horse for Chinese steelmakers and infrastructure groups – the most likely funding sources for such a big infrastructure play.
MD also quite likes the theory that the offer may be a clever ploy designed to flush out third-party bids.
Given that Wah Nam already holds 19% of FerrAus and 22.6% of Brockman, that scenario may deliver it a nice trading profit if the likes of Fortescue Metals Group were to enter the fray.
Credit Suisse notes that FMG’s recent refinancing lifted the merger and acquisition restrictions associated with its 2006 senior notes covenants.
“The new notes allow FMG to be more corporately active,” it says.
Although FerrAus and Brockman currently own stranded deposits, the broker says it would be “amazed if FMG has not already had serious discussions with Brockman and perhaps FerrAus too regarding possible BCI-style infrastructure access JVs”.
Longer term, the bank sees a risk that FMG’s Chichester projects will not reach their 90 million tonne per annum target, meaning that the shortfall could be made up with additional ore from projects such as Brockman/FerrAus.
As it stands, MD can’t see many Brockman and FerrAus punters jumping at the chance to swap their investments for wads of limousine-backed Hong Kong paper, even if Wah Nam is promising a listing on the Australian Securities Exchange down the track.
If nothing else, it illustrates China’s keenness (or should that be desperation?) to snaffle independent Aussie iron ore resources, no matter how large the hurdles.
One reason may be that the Asian Dragon sees continued tightness in the market ahead.
Recent work by Macquarie suggests that supply-side iron ore growth is set to underperform relative to stated plans in coming years.
Thus, the long-feared market surplus may still be some way off.
“There is a huge volume of potential supply on paper, but myriad issues commonplace to the industry are likely to cause significant delays,” Macquarie said, citing problems such as infrastructure, environmental permitting, spiralling capital costs and the “disinclination” of equity markets to finance projects.
As a result of delays and the “degradation” of Chinese mines, increased volumes of higher cost Chinese domestic ore are required to balance the market for longer, the bank says.
Cost inflation in the Chinese domestic industry is thus key, and “we think marginal suppliers will keep the average spot price well supported above $US135 per tonne during 2011-13”, it said.
The other interesting angle to Wah Nam’s bid is the effect on the North West Iron Ore Alliance, of which Brockman and FerrAus are members, alongside Atlas Iron.
The obvious question is why didn’t Wah Nam bid for Atlas?
It is not as though Atlas is a lot more expensive – its market cap is $A1.6 billion – and it is already in production.
Perhaps Atlas is part of another yet-to-be-unveiled Chinese gambit, perhaps involving Ridley and/or Balla Balla magnetite.
Apparently it is business as usual at the NWIOA as it seeks to finalise the feasibility study on its $2.1 billion port at South West Creek by early next year.
The ultimate aim is to start shipping from the new port, which is critical to Atlas’ long-term growth ambitions, by 2013.
Even before the bid lobbed, that target was seen as highly ambitious by most in the industry, given the amount of environmental permitting and construction involved.
Industry insiders believe that 2014 is probably a more realistic aim for the alliance’s two berths to start shipments.