Upload
nguyen-hong-hiep
View
295
Download
22
Tags:
Embed Size (px)
DESCRIPTION
my assignment in project finance
Citation preview
Melb. Consulting
Address: Melb. Consulting
198 Berkeley Street Victoria 3010, Australia
May 2013
Aquila Resources West Pilbara Iron Ore Project
Project Finance Study
West Pilbara Iron Ore Project (Aquila Resources)
1
Group Member’s Name Student Number
1. Xiaolin Hu 578974
2. Mengjie Ni 571107
3. Yalei Cao 557841
4. Congcong Su 576424
5. Nguyen Hong Hiep 595502
Subject Name FNCE90048 Project Finance
Case Selected Aquila Resources $7.4 b Iron Ore Project WA
Due Date Tuesday, May 14 (12:30pm)
We certify that:
1. This submission is our own original work.
2. This submission is based on our own research.
3. All sources used by us have been documented.
4. This piece of work has not previously been submitted for assessment in this or any other
subject.
West Pilbara Iron Ore Project (Aquila Resources)
2
EXECUTIVE SUMMARY
The purpose of this report is to conduct an in-depth analysis of West Pilbara Iron Ore Project
(WPIOP), identify key risk factors for WPIOP and evaluate corresponding risk mitigation strategies.
Comparable projects are also discussed in this report to further analyse risks of WPIOP, followed by
recommendations to sponsors.
The Project WPIOP is a greenfield iron ore mine in Western Australia, the flagship project of Aquila
Resources Limited. WPIOP is managed by API Management Pty Ltd for APIJV (Aquila/ AMCI) and
currently in progress of stage one. The WPIOP is located in the Pilbara region of Western Australia,
based on iron ore deposits approximately 30 km to 85 km south west of Pannawonica. The amount
of funding required to complete WPIOP is estimated around 7.4 bn.
Project risks are assessed according to the degree and probability of the adverse results that are
anticipated to take place. Risks are categorized in “High, Medium or Low” based on the degree of
likelihood. According to the level of priority, 5 major project risks are further discussed in this report:
Financial Risk
Operating Risk
Environmental Risk
Credit Risk
Construction and Development Risk
Risk analysis and risk mitigation strategies were developed after the risk assessment. Utilising
necessary financial instruments such as future, swap and option, diversifying source of financing the
project are key strategies to manage commodity price volatility, hedge foreign exchange risks,
reduce refinancing risk for financial risk mitigation purpose. Regarding operating risks, long-term
take or pay agreement and iron ore derivatives are the methods to mitigate risk. Mitigation strategies
for environmental risk cover detail plans with regard to environmental factors, such as troglofauna,
terrestrial fauna and vegetation. Using external credit ratings, developing internal credit ratings for
customers and utilising trade finance are ways to better manage credit risk. Additionally, in terms of
construction risks, it is possible to transfer risks to other parties by long term fixed contracts.
Collaboration is a good way to cut down capital expenditure and generate further revenues.
SWOT analysis further evaluates the strength, weakness, market opportunities and threats of WPIOP,
works out internal and external factors that influence this project as well as gains insight into the
potential and significant issues affecting WPIOP.
Comparable projects from Rio Tinto and Roy Hill Iron Ore Mine are analysed to better understand
WPIOP’s relative positioning among peer projects. Lessons are summarised from comparison with
other projects.
At the end of this report, some recommendations are given regarding to a variety of mitigation
strategies to minimize the negative effects associated with those risks identified and providing
insurance to some extents ensuring the final success of this large project of Aquila.
West Pilbara Iron Ore Project (Aquila Resources)
3
Table of Contents
EXECUTIVE SUMMARY ................................................................................................................... 2
1 INTRODUCTION ......................................................................................................................... 5
1.1 Background ............................................................................................................................. 5
1.2 Project Overview ..................................................................................................................... 5
1.2.1 Construction timeline and project products .......................................................................... 5
1.2.2 Project development.............................................................................................................. 5
1.3 Project Structure ...................................................................................................................... 6
1.3.1 Joint venture structure ........................................................................................................... 6
1.3.2 Third parties .......................................................................................................................... 6
1.3.3 Customers ............................................................................................................................. 6
1.3.4 Funding Sources.................................................................................................................... 7
2 RISK IDENTIFICATION ............................................................................................................. 8
2.1 Risk Categorization ...................................................................................................................... 8
2.2 Key risks in Aquila Resources Iron Ore Project .......................................................................... 9
3 PROJECT RISK AND RISK MITIGATION .............................................................................. 10
3.1 Financial Risk ........................................................................................................................ 10
3.1.1 Commodity Price Risk ........................................................................................................ 10
3.1.2 Foreign Exchange Rate Risk ............................................................................................... 11
3.1.3 Refinancing Risk ................................................................................................................. 11
3.2 Operating Risk....................................................................................................................... 12
3.2.1 Market Risk ......................................................................................................................... 12
3.2.2 Competition Risk ................................................................................................................ 13
3.2.3 Accessibility Risk ............................................................................................................... 14
3.2 Environmental Risk ............................................................................................................... 14
3.3.1 Risk Analysis ...................................................................................................................... 14
3.3.2 Mitigation Strategies ........................................................................................................... 16
3.4 Credit Risk............................................................................................................................. 17
3.4.1 Risk Analysis ...................................................................................................................... 17
3.4.2 Mitigation Strategies ........................................................................................................... 18
3.5 Construction and Development Risk..................................................................................... 19
3.5.1 Risk Analysis ...................................................................................................................... 19
3.5.2 Mitigation Strategies ........................................................................................................... 19
4 SWOT ANALYSIS ..................................................................................................................... 20
5 COMPARISON WITH OTHER PROJECTS ............................................................................. 21
West Pilbara Iron Ore Project (Aquila Resources)
4
5.1 Pilbara iron ore project, Rio Tinto ............................................................................................. 22
5.2 Roy Hill Iron Ore Mine, Hancock Prospecting, Posco & KJTC ............................................... 22
5.3 Lessons ....................................................................................................................................... 23
6 CONCLUSION AND RECOMMENDATIONS ........................................................................ 24
REFERENCES .................................................................................................................................... 25
Appendix A .......................................................................................................................................... 28
Appendix B .......................................................................................................................................... 28
West Pilbara Iron Ore Project (Aquila Resources)
5
1 INTRODUCTION
1.1 Background The West Pilbara Iron Ore Project is a substantial iron ore export operation proposed for the Pilbara
region of Western Australia. The project is currently in the first stage of development that covers an
area of 9000 km2
based initially on pisolite iron ore deposits. There are several open-cut mining
deposits of iron-ore (hematite) spread over 60 kilometers, which are located 30 km to 85 km south
west of Pannawonica. The estimate total base case capital cost has gone up to $7.4 billion due to
additional costs in implementing Anketell Port Master Plan. Operating costs have increased to
$24.20 per dry metric ton in the entire life cycle of the project. This stage includes the construction
and development of eight mining area and a 282 kilometers of heavy haul railway infrastructure and
a multi-user deep-water port at Anketell Point. There will be three mining hubs, to be known as
North, Central and South. The annual production is expected to reach 30 million tons, for 15 years
(Aquila Resources, 2012).
1.2 Project Overview
1.2.1 Construction timeline and project products Construction is expected to commence in the early of 2014, with the first ore on ship in 2017 (Aquila
Resources, 2012). Products are direct ship channel iron and bedded iron fines.
1.2.2 Project development
December 2011, stage one conditional State and Federal environmental approvals for Mine
and Rail were received and in February 2013, State environmental approval was received for
Anketell Port.
Mining Lease application has already been submitted.
June 2012 feasibility Studies for the Mt Stuart Iron Ore Joint Venture and the Red Hill Iron
Ore Joint Venture confirmed the technical and economic viability of two key iron ore
suppliers to the West Pilbara Iron Ore Project.
Granted “Major Project Facilitation” status by the Federal Government.
Total Mineral Resource Estimate for the West Pilbara Iron Ore Project and wider Pilbara
West Pilbara Iron Ore Project (Aquila Resources)
6
tenements now increased to 2,233Mt.
Dispute between Aquila Resources and AMCI (IO) Pty Ltd in terms of proposed budget was
resolved.
Native Title negotiations with relevant Aboriginal groups are progressing.
1.3 Project Structure
1.3.1 Joint venture structure
WPIOP is managed by Australian Premium Iron (API), which is equally (50:50) owned by Aquila
Resources and American Metals and Coal International (AMCI), a private global mining investment
company.
The West Pilbara Iron Ore Project Stage one includes (API, 2013):
Project Parties Participating Interests
West Pilbara - Red Hill Iron Ore Project API &
Red Hill Iron Limited
API 60% earning up to
80%
West Pilbara - Mt Stuart Iron Ore Project
API &
Cullen Resources
Limited
API 70%
.
1.3.2 Third parties The project is developed under multi-user facility, involving Fortescue Metals Group (“FMG”) and
China Metallurgical Group Corporation (“MCC”) (ASX, 2010).
1.3.3 Customers
Memorandum of Understanding was executed, taking the total of 40 MoU with steel mills in
China, Japan, Korea and Taiwan (ASX, 2010).
Baosteel, the largest iron and steel conglomerate in China and a major shareholder of Aquila
Resource, is actively participated in this project to secure a long-term supply of steel raw
materials
West Pilbara Iron Ore Project (Aquila Resources)
7
Cooperation
Dividend
Debt
Repayment
Consulting
service
1.3.4 Funding Sources
Aquila Resource has settled down $250m 12 month unsecured Corporate Facility with NAB and
CBA (ASX, 2011).
Aqulia signed a Memorandum of Understanding with China Development Bank Corporation
(“CDB”), which provides potential opportunities to secure long-term financing from CDB.
Lenders
NAB
CBA
CDB
Other international banks
West
Pilbara
Iron
Ore
Project
Sponsors
API (Aquila & AMCI)
Red Hill Iron Limited
Cullen Resources Limited
Regulators
State Government
Federal Government
Environmental Protection
Authority
Other regulations
Consultants
Members of the Australian
Institute of Mining and
Metallurgy
Director of ORElogy
CSIRO
Strategen Environmental
Consultants Pty Ltd
Aquaterra, Biota
Environmental Services
Major Contractors Infrastructure - Worley
Parsons
Rail Facilities -
Calibre/Engenium
Marine Facilities – Aecom
AECOM
Strong mills support - 40 MoU signed
with Chinese, Japanese, Taiwanese
and Korean mills. Third Parties
FMG
MCC
Equity
West Pilbara Iron Ore Project (Aquila Resources)
8
2 RISK IDENTIFICATION
2.1 Risk Categorization Lists of risks involved in Iron Ore Project WA were assessed. Based on the combination of estimated
severity and probability of occurring, the total potential impact was listed below. According to risk
rating, risks have been graded as “Low” “Medium” and “High”. The risk matrix was demonstrated in
Graph 1.
Graph 1: Risk Matrix
West Pilbara Iron Ore Project (Aquila Resources)
9
2.2 Key risks in Aquila Resources Iron Ore Project
Based on analysis, five major risks were identified and will be discussed further in Part 3.
Risk Categories Subcategories
Financial Risk
(Sponsors and lenders) Commodity Price Risk
Foreign exchange rate risk
Refinancing risk
Operating Risk
(Sponsors) Market Risk
Competition risk
Accessibility Risk
Environmental Risk
(Sponsors and lenders) Troglofauna
Terrestrial fauna & Marine fauna
Vegetation and flora
Breach of regulations
Credit Risk (Sponsor and lenders) Credit Risk
Construction and Development Risk
(Sponors, lenders and contractors)
Cost Overrun
Delay
Infrastructure Risk
West Pilbara Iron Ore Project (Aquila Resources)
10
3 PROJECT RISK AND RISK MITIGATION
3.1 Financial Risk
3.1.1 Commodity Price Risk
3.1.1.1 Risk Analysis
Equity markets are becoming increasingly sensitive to macroeconomic news, and for many
organizations increases in commodity prices are often not fully impacting share prices, whereas
decreases are.
The iron-ore market price had recovered in 2010 and 2011 after being pummelled by the 2008
worldwide economic downturn, with prices hitting highs of $193/ton as steel output reached record
levels. The price rally was short-lived as prices dropped sharply in 2012, hitting a three-year low of
$86.70/ton in September that year. Prices have since recovered again, but several analysts forecast
that the iron-ore sector will experience a difficult period over the following 12 to 18 months,
resulting from excess supply and projected slower steel output in China. The long-term outlook for
iron-ore remains positive, albeit cautious, with the world’s biggest iron-ore miners – Vale, Rio Tinto
and BHP Billiton – expecting China to be the major demand driver for the mineral until the end of
the 2020s, when India and other developing countries are expected to take lead as Chinese growth
diminishes.
Figure 1: Prices of iron ore (2009-2016F)
Source: KPMG analysis
3.1.1.2 Mitigation Strategies
The use of derivatives such as future, swap or option is necessary in this situation to lock in the price
as well as to protect project owners from the fluctuated price.
West Pilbara Iron Ore Project (Aquila Resources)
11
3.1.2 Foreign Exchange Rate Risk
3.1.2.1 Risk Analysis
The term exchange rate risk here refers to situations in which movements in exchange rates alter the
financial performance of firms as measured by conventional financial statements and/or corporate
cash flows. The market price of iron ore is denominated in USD while all of the accounting figures
of the Aquila’s project are calculated in AUD. Hence, the exchange rate between AUD and USD
indirectly influences the financial performance of the project. A depreciation of AUD will be good
news for the project owners because the price of iron ore in AUD may increase while it remains the
same in USD. On the contrary, the increasingly stronger AUD will reduce the returns of Aquila.
3.1.2.2 Mitigation Strategies
Similar to the approach in managing the commodity price risk, Aquila should alternatively use
derivatives such as future, option, forward or swap to hedge the foreign exchange risk.
3.1.3 Refinancing Risk
3.1.3.1 Risk Analysis There are various manifestations of refinancing risk – the cost of finance may be higher than
assumed, or it may be unavailable, or only available on terms that are not compatible with the
existing transaction structure or documentation. In the absence of measures to mitigate or reallocate
the risk, it naturally falls in the first instance on the project (inability to refinance will result in
default, and a refinancing on more onerous terms will affect the sponsor’s return and may necessitate
the injection of additional equity), and on the incumbent lenders (who must weigh up their potential
exposure on contractor default termination against the prospect that continuing to fund the project
may be a loss).
3.1.3.2 Mitigation strategies
To mitigate this risk, Aquila should diversify the project’s financing sources. Refinancing risk,
especially in markets vulnerable to a credit crunch or in which long-term maturities are not available,
West Pilbara Iron Ore Project (Aquila Resources)
12
a combination of bank loans, bonds fully enhanced or wrapped, unenhanced bonds, and domestic and
international credit, among other sources, can mitigate refinancing risk.
3.2 Operating Risk
3.2.1 Market Risk
3.2.1.1 Risk Analysis
Given the final output of this project, the volatility in market demand for iron ore as well as its
price changes primarily constitutes the market risk.
Based on Australia Iron Ore Report (IBISWorld, 2012), world demand for steel directly affects the
demand for iron ore. The largest consumer for WA iron ore is Chinese steel manufacturer that
makes up 69% of iron ore export (Hart, 2011). However, Chinese demand for the steelmaking raw
material is slowing down in recent years (Xu, 2011). The volume of iron ore exported would drop
(Power, 2011).
Currently, there is an oversupply of global iron ore. China Mining Report (2011) expects that Rio
Tinto would duplicate its production by 2015. The iron ore production in Australia is forecasted to
reach 630 million tones in 2015 (India Shipping Report, 2011). In addition, the Australian Bureau
of Resources and Energy (BREE, 2013) forecasts that iron ore export will increase to 831 million
tones due to higher exports from Brazil (the world’s second-largest iron ore exporter).
An uptick in global iron ore supply and slackening Chinese demand have underpinned bearish
sentiment about the future of iron ore price, which will reach $90 per tonne by 2018 against the
current price of about $150 (BREE, 2013).
3.2.1.2 Mitigation Strategies
Long-term take or pay agreement can be used to guarantee the volume of iron ore to be produced
and exported;
Contract price can be negotiated between Aquila and its major consumers like China and Japan on
West Pilbara Iron Ore Project (Aquila Resources)
13
an annual base to reflect the market conditions (IBISWorld, 2012);
Iron ore derivatives like forward, swap and option can be used to lock price or mitigate the loss
otherwise occurs (Madsen & Tseng, 2012).
3.2.2 Competition Risk
3.2.2.1 Risk Analysis
Local producers not only compete against each other, but also against operators in other countries-
--that’s a global competition in iron ore mining industry (Fielding, 2013).
The world competition in iron ore mining industry increased a lot in recent years and especially
the expansion of exports from Brazil (BREE, 2013) impacts the Australian miners. In addition, the
competition in local place is also intense given the outperformance of the leading companies, e.g.
BHP and Rio Tinto secure a premium for their iron ore from Asian consumers due to lower
shipping costs (IBISWorld, 2012).
Higher competition implies higher volatility in business operations.
3.2.2.2 Mitigation Strategies Competition-intensive mission/objective should be constituted that drive appropriate strategies;
Lower cost strategy can be applied by controlling variety costs including material, workforce,
capital expenditure and shipping to avoid a weak competition status that may result in market
share losing (Middelbeek, 2012 & Tseng, 2012);
Establishing and keeping stable relationships and links with local and overseas steel manufacturers
enable miners to access market easily even though during downturn (IBISWorld, 2012).
West Pilbara Iron Ore Project (Aquila Resources)
14
3.2.3 Accessibility Risk
3.2.3.1 Risk Analysis
For companies like Aquila who do not have their own rail line and water port, they have to access
other companies’ facilities to transport their iron ore to overseas. This will lift the freight cost and
as a result, the profit earned by the miner will be lowered or the market share will be reduced if
they mark up more on the price (Metal Bulletin, 2013).
Additionally, failing to access to other mining company’s railway will trigger the accessibility risk
that the transportation of iron ore is delayed and sales are stuck (Knox, 2010).
Madsen (2013) reported that Rio Tinto had won a legal battle to keep other iron ore producers off
its Hamersley and Robe rail lines in Australia.
Even though deep-water port and railway is under the current project, there is still a high risk that
infrastructure construction cannot be completed.
3.2.3.2 Mitigation Strategies High skill is required in negotiating rail access agreement with leading companies like BHP
Billiton (IBISWorld, 2012);
Better controlling on construction risk associated the current project to ensure the infrastructure
being completed on time (Tseng, 2012).
3.2 Environmental Risk
3.3.1 Risk Analysis In the released Public Environmental Review and Environmental Report, API identified a few
major environmental risks based on the likelihood, consequences and confidence levels of
predicted impacts (API, 2011).
West Pilbara Iron Ore Project (Aquila Resources)
15
- The preliminary risk assessment conducted during the scoping stage indicated that
without proper risk mitigation, West Pilbara Iron Ore Project will result in permanent
removal of habitat, leading to direct loss and change to troglofauna habitat and mortality
of individuals, which is considered as the highest risk imposed.
- Terrestrial fauna as well as marine fauna are exposed to high risk due to ground
disturbance, removal of habitat, dredging, disposal as well as underwater noise emissions.
- Vegetation and flora is at risk due to potential negative impact from clearance of a
maximum of 4,970 ha for the mine area and up to 4,550 ha for the transport corridor. The
diversity and distribution of flora as well as health of groundwater is threatened. In
addition, the aspects and potential impacts of the project may affect eight Priority flora
species (Western Botanical, 2010).
- Landform and geodiversity is at risk because of ore and overburden removal. The project
will potentially result in disturbance or partial loss of an estimated 2.6% of palaeochannel
landform.
- There are potential impacts on air quality and a possible increase in greenhouse gas
emissions.
More strict environmental regulations are imposed on new iron ore projects. Although Project
has received primary condition environmental approvals from State and Federal for Main and
Rail, it is still waiting for primary Federal approval of Anketell Port. Furthermore, project is also
required by legal framework to get secondary approvals. Great deals of investigation and
ecological research have to be accomplished before getting approvals. It will generate significant
costs to prepare these materials. (ASX Release, 2011&2013)
Any significant, material breach of environment regulations or approval conditions will result in
fines or discontinuity of projects (Environmental Defender’s Office, 2011).
West Pilbara Iron Ore Project (Aquila Resources)
16
3.3.2 Mitigation Strategies
Risk treatments include controls on blasting and hydrocarbons, backfilling and rehabilitating
mine pits. Blasting with a low powder factor can be established to ensure stability of pit walls. A
troglofauna research program should be developed and 50% of channel iron deposits (potential
troglofauna habitat) should be retained (EPA, 2011).
Minimise clearing based on minimum necessity for development. Avoid possible infrastructure
construction within designated areas which is marked as habitats for fauna of high conservation
significance.
Vegetation and flora protection should be written in contracts. Identify rare and priority flora
species and ensure they are protected during the mining. Establish controls on weeds, dust
drainage and water management.
Utilising existing rail and port facilities as far as possible to reduce disturbance while
undertaking exploration, development and mining.
Participate in the National Greenhouse Emissions Reporting System (NGERS) and any
Australian Emissions Trading Scheme (API, 2011).
Conduct extensive environmental surveys and broad consultation regarding environmental issues.
Establish a sound Environmental Management Plan with clear targets, commitments, risk
mitigation strategies as well as ongoing monitoring. Have an intimate knowledge of various
environmental issues and get familiar with legal framework and regulations to ensure the safe
and sound environment practices are carried out.
Seek comprehensive environmental insurance programs to secure the optimal insurance coverage
for this project.
West Pilbara Iron Ore Project (Aquila Resources)
17
3.4 Credit Risk
3.4.1 Risk Analysis In an increasingly competitive supply environment, large export iron ore producers like Aquila have
been required to accept credit risk from a wider variety of international customers. Over the past two
decades, export producers have become more accustomed to huge credit exposures and more relaxed
about the financial standing of their customers as they vied to sell their product to both industrial
sector customers and the increasing number of trading houses focused entirely on commodity
speculation. For all but the most disciplined of producers, the pressure to produce volume and
preserve price overpowered the ability to manage credit risk at acceptable levels. For many
producers, the customer track record of payment remains the only metric used to assess the credit
worthiness of a customer.
Figure 2: Increasing credit risk
Source: PwC analysis
From the middle of 2008, many iron ore customers began to aggressively negotiate reductions to
contractually agreed prices and in some cases deferring and cancelling shipments. This is
unsurprising given that a shipment of iron ore purchased when prices were at their peak could be
purchased on the spot market for tens of millions of dollars less by the time the loaded freighter was
in transit. Faced with increased customer reluctance to accept contracted shipments, producers
quickly began to quantify their credit exposures and realised the significant risk of payment default
they faced from some of their biggest customers.
West Pilbara Iron Ore Project (Aquila Resources)
18
3.4.2 Mitigation Strategies Using external credit ratings
Utilising international rating agency information from Moody’s and S&P is a key element of a
sound credit management methodology. Investment grade ratings provide the yardstick for
acceptable counterparty risk and contractual risk accepted with customers defined by rating
agencies as being below investment grade should typically return a higher level of reward.
Developing internal credit ratings for customers
The development of an internal credit rating system is vital for producers in the global market.
Implementing such a system requires a producer to move beyond historical measures and think
carefully about the factors that impact credit worthiness of their particular customer base.
Managing to limits
A credit limit is defined as the total amount of outstanding debt that a producer is prepared to
accept from a customer. A credit limit is one of the most important key control points in the
credit management process.
Trade finance, credit insurance and banking relationships
Trade finance is an important aspect of the credit management process and must be managed
tightly to avoid unintended unsecured risk. The credit risk protection provided by letters of credit
used to secure payment for a shipment commonly become invalid due to the inability of the
producer to comply with the strict documentation requirements of the bank. In the event of
payment default in such circumstances, the producer has no recourse to the issuing or confirming
bank and has wasted time and money confirming the letters of credit.
Trade banks and credit insurers are excellent sources of information for iron ore producers.
Banks typically have professional credit departments with deep information. It is in a bank’s
interest to share credit related information with the producers using their services where it is legal
to do so.
West Pilbara Iron Ore Project (Aquila Resources)
19
3.5 Construction and Development Risk
3.5.1 Risk Analysis Cost overrun
In order to comply with the West Australia State Government’s Anketell Port Master plan,
capital cost has increased to $7.4bn in July 2012 from $5.7bn in July 2010.
Delay Risk
To compared Appendix A (Original plan) with Appendix B (Year 2012), there is no doubt that
the project keeps delaying its process.
Lack of infrastructure
Project must be able to connect with rail or port facilities for export purpose. However, there is
no sufficient infrastructure available. Infrastructure risk has become a significant barrier for the
project WPIOP and greatly reduces the economic value of the discount project.
3.5.2 Mitigation Strategies
Cooperation with a third party is one of the methods to maximize the utilization of project facilities
which are connected with to the port facilities at Anketell Point.
Risk hedging through long-term fixed contracts.
Utilizing equipment and services related to mining and rail haulage which are provided by
appropriate contractors will also be a way to reduce capital expenditure.
Outsourcing key packages is considered by the Capital Optimization Study team as an approach to
reduce capital cost to $5.0bn from $7.4bn; however, it also increases $15.00 per dmt operating
costs.
Transferring the construction cost rise-and-fall risk to service providers is an additional benefit
while performing outsourcing key package strategy.
West Pilbara Iron Ore Project (Aquila Resources)
20
4 SWOT ANALYSIS
Strength
CSIRO compact sinter testing results demonstrated that products of West Pilbara are very
compatible with certain sinter feeds (Aquila Resources, 2012).
Baosteel, the world’s second largest iron producer and a major shareholder of Aquila, will
continue to support the development of the West Pilbara Iron Ore project.
Port is easily expandable to approximately 350Mtpa (Aquila Resources, 2012).
It has secured State environmental approval for its port development plan and has settled down
sale arrangements to fund the project.
Geotechnical and water drilling along the rail route provide detailed information for the design of
railway and bridges and ensure suitable water sources for construction.
Weakness
Aquila resource suffered cash flow difficulties. No dividend was paid in 2012.
As a capital intensive project, the WPIOP’s total base case capital cost keeps increasing.
Aquila Resource is a relatively small-sized company compared to BHP Billiton, Rio Tinto and
FMG.
Occurrence of disputes between joint venture parties could significantly block the whole project
process.
Opportunity
Rapid economic growth in emerging countries drives the higher global demand for iron ore
(IBISWorld, 2012).
WPIOP’s Anketell port would play a significant role after the ports used by Rio Tinto and BHP
Billiton ran out of capacity (API, 2011).
There exists opportunities to transfer risks to a third party or other service providers as well as
increase overall project returns by effective cost saving strategies.
Government is willing to support this project.
West Pilbara Iron Ore Project (Aquila Resources)
21
Threats
Keen competitions from domestic Iron Ore companies as well as international players.
High Australian dollars lead to difficult positions for exports.
Iron Ore price hit a three year low, resulting in a revenue decrease.
Mineral Resource Rent Tax and Carbon pricing would negatively impact the project (IBISWorld,
2012).
Shortage of skilled workforce pushes up labor cost (IBISWorld, 2012).
Strong bargaining power of customers. Baosteel, the major purchaser of iron ore, controls 15% of
Aquila Resources.
Uncertainty timing in terms of collecting all government approvals.
5 COMPARISON WITH OTHER PROJECTS
Sources: Aquila’s quartly reports (2013), Rio Tinto’s annual report (2012), Hancock’s iron ore
review( 2012).
Projects West Pilbara Iron
Ore Mine, Rail &
Port (Stage 1)
Pilbara 283 Mtpa
Expansion
Roy Hill Iron Ore
Mine
Investment $7.4 billion $10.2 billion $9.5 billion
Resources 2.233 Bt 17 Bt 2.4 Bt
Production 30 Mtpa 53 Mtpa 55 Mtpa
Railway 282 km 1,400 km 344 km
Employees 3,200 6,000 5,600
Owner/Joint
Venturers
Australian Premium
Iron Ore JV
(Aquila & AMCI)
Rio Tinto Hancock Prospecting,
Posco & KJTC
Status Under Construction Construction Construction
Start-up Mar 2014 Dec 2013 Dec 2014
West Pilbara Iron Ore Project (Aquila Resources)
22
5.1 Pilbara iron ore project, Rio Tinto
The largest integrated mining project in Australian history.
It comprises 13 mines, three shipping terminals at two ports and a rail network spanning
almost 1,400km.
It can currently produces 237 million tonnes of iron ore each year and is undergoing a major
expansion programme to increase this to 283 million tonnes a year by 2013 and then 360
million tonnes per year in 2015.
As a business, Rio Tinto doesn’t just mine ore, it occupies the leading position in technology
and innovation for their industry; it owns properties, pastoral stations and provides utilities
and facilities to a number of towns in the Pilbara.
Rio Tinto’s purpose-built Operations Centre in Perth is the primary control centre for their
Pilbara network. It is one part of their Mine of the Future™ programme – introducing new
and improved ways of mining through automation and remote operation.
Other innovations include autonomous haul trucks, trialled at their Theyst Angelas mine
since 2010 and recently deployed at Yandicoogina mine.
They are using technology to increase the automation of their train operations, with the first
phase of the AutoHaulTM project being installed by 2014 – this implementation will create
the first long distance, heavy haul system of its kind in the world and will be a key enabler of
their expansion programme.
They are implementing remote controlled drills to enable drill-and-blast extraction of ore,
tele-operated shiploading at their ports and ore sorting technology among many more projects.
They have also invested more than US$500 million in cleaner and more sustainable power
generation to supply electricity to their port and mine operations.
5.2 Roy Hill Iron Ore Mine, Hancock Prospecting, Posco & KJTC
Located in Pilbara, Marra Mamba iron ore deposit is a world-class and low phosphorus one,
and it is the only independent iron ore project with West Australian majority ownership.
The Roy Hill Project has a defined mineralisation of more than 2.4 billion tonnes of +55% Fe
iron ore, enough to sustain a mine life of more than 20 years.
A 344 kilometre heavy haul railway will be constructed and the Roy Hill railway will operate
five ore trains per day, each consisting of three locomotives hauling 232 ore cars with a total
payload of 31,450 tonnes of ore.
West Pilbara Iron Ore Project (Aquila Resources)
23
Roy Hill’s purpose built iron ore port facility at Port Hedland will be constructed to receive,
stockpile, screen and export 55Mtpa (wet) of direct shipped iron ore as lump and fines and
will be designed to accommodate future expansion.
Roy Hill will introduce a significant new dimension to the mining industry, with the
construction of a Perth-based integrated Corporate Headquarters and Remote Operations
Centre (ROC). The ROC will provide end-to-end integration of operations by managing
safety, human capital and production through the adoption of state-of the-art automation.
Roy Hill has embraced technology as a core element across all levels of its operations to
ensure that it drives optimum operational efficiency in the delivery of 55mtpa of iron ore to
world markets.
Roy Hill has adopted automation as a strategic objective, with the view of ‘industrialising’
the mining and logistics operations as much as possible. The company’s overarching vision is
that through automation, it will achieve a higher level of safety and operational efficiency, a
reduced dependency on site-based personnel and greater reliability and operational
efficiencies.
By taking advantage of the Greenfield nature of the Project and embedding automation
technology within the operational design from day one, Roy Hill will avoid the change
management and retrofitting issues encountered by other organisations when introducing
automation technology.
5.3 Lessons
Their initiatives will help reduce their environmental footprint and operating costs, provide
greater efficiency and offer their staff more flexible working conditions and career options.
Encourage employees to use innovative thinking to not only solve problems they encounter in
their roles, but to also use this thinking to continually design and improve business processes
and systems in all areas of the organisation.
Optimise the control of their operations while also managing risks and regulatory
compliance by utilising advance technology.
West Pilbara Iron Ore Project (Aquila Resources)
24
6 CONCLUSION AND RECOMMENDATIONS
The Aquila Resources Iron Ore Project is most vulnerable to financial, operating, environmental,
credit and construction and development risks.
Use financial derivatives like future, option and swap to lock the USD/AUD exchange rate and
diversify the sources used to finance the project to reduce the refinancing risk.
Market risk can be mitigated by a long-term take or pay agreement to guarantee the volume and
iron ore. Derivatives like forward, swap and option can reduce the loss that otherwise would occur
due to price dropping.
Given intense global competition in this industry, management should pay more attention to cost
control and keep stable relationships with major consumers.
To avoid iron ore transportation delay and sales stuck, high skill is required in negotiating rail
access agreement with leading companies and better controlling on infrastructure construction is
needed to ensure the final completion.
Understanding of the environmental implications. Establish a sound Environmental Management
Plan with clear targets, commitments, and risk mitigation strategies. Develop a monitoring program
with a clear goal of minimising clearing, educating workforce and carrying out rehabilitation.
For credit sales, Aquila can use both external and internal rating to evaluate its customers’
creditworthiness. Manage the credit limit offered to customers can help reduce the loss on default.
Furthermore, trade finance and credit insurance are another two effective tools to mitigate the
credit risk.
It is urgent to make decisions on what kind of cost controls can be implemented to accelerate the
process of obtaining approvals and to settle the problems associated with lacking of infrastructure
to mitigate the construction and development risks.
West Pilbara Iron Ore Project (Aquila Resources)
25
REFERENCES
API (2013). West Pilbara Iron Ore Project. Retrieved from
http://www.apijv.com.au/default.aspx?MenuID=4
API (2010). West Pilbara Iron Ore Project Stage 1 Mine and Rail – Public Environmental Review,
API Management Pty Ltd, June 2010.
API (2011). Presentation at the 11th China Int’l Steel & Raw Materials Conference. Retrieved from
DatAnalysis Premium database.
API (2011). West Pilbara Iron Ore Project Stage 1 Mine and Rail – Response to Submissions Report,
API Management Pty Ltd, February 2011.
Aquila Resources (2012). Annual report 2012. Retrieved from http://www.aquilaresources.com.au/
Aquila Resource (Nov 2012). Annual General Meeting Presentation. Retrieved from DatAnalysis
Premium database.
Aquila Resources (Nov 2012).Quarterly Report December 2012. Retrieved from DatAnalysis
Premium database.
ASX Release (June 2010). Memorandum of Understanding Reached with China Development Bank
Corporation. Retrieved from DatAnalysis Premium database.
ASX Release. (December 2010). West Pilbara Iron Ore Project-Conditional Approval for Stage 1
Mine Development. Retrieved from DatAnalysis Premium database.
ASX Release (July 2010).West Pilbara Iron Ore Project Definitive Feasibility Study. Retrieved from
DatAnalysis Premium database.
ASX Release (September, 2011). West Pilbara Funding Update. Retrieved from DatAnalysis
Premium database.
ASX Release. (October 2012). West Pilbara Iron Ore Project Capital and Operating Cost Revision.
Retrieved from DatAnalysis Premium database.
Environmental Defender’s Office of Western Australia (2011). Overview of environmental law in
Western Australia. Retrieved from
http://www.edowa.org.au/files/factsheets/iel_introenvirolaw.pdf
West Pilbara Iron Ore Project (Aquila Resources)
26
EPA (2011). Report and recommendations of the Environmental Protection Authority - West Pilbara
Iron Ore Project Stage 1 Mine and Rail Proposal. Retrieved from www.epa.wa.gov.au
Ernst &Young (2012). Business risks facing mining and metals 2012-2013.Retrieved from
http://www.ey.com/GL/en/Industries/Mining---Metals/Business-risks-facing-mining-and-
metals-2012---2013
Fielding, Z. (2013). The world at his door. AFR Smart Investor, 8(3), 44-46.
Global mining outlook. (2011). China Mining Report, Q1, 1, 9-11.
Global overview. (2011). India Shipping Report, Q4, 3(4), 11-41.
Hart, J. (2011). Iron ore risk: a price worth paying? Banker, 161 (1025), 42-44.
IBISWorld (2012) Report B0801 Iron ore mining in Australia Industry. Retrieved from IBISWorld
Database.
Knox, M. (2010). The deal is simple. Australia gets money, China gets Australia. Bloomberg
Businessweek, 4194, 44-49.
Madsen, M. (2013). Australia to see further iron ore prices fall, higher exports in 2013. Metal
Bulletin, 9295, 113.
Madsen, M. (2013). Rio wins appeal to keep third parties off Australian iron ore rail lines. Metal
Bulletin Daily, 351, 81.
Madsen, M. & Tseng, D. (2012). Iron ore derivatives wrap: OTC prices, volumes bounce higher.
Metal Bulletin Daily, 342, 179.
Middelbeek, E. (2012). Further tests to reduce Ferrex’s Malelane iron ore capex to less than $298m.
Metal Bulletin Daily, 313, 41
Power, B. (2011). Australia’s miners and the iron ore wall of supply. Asiamoney, 22(10), 49-54.
Rio Tionto (2012). Iron ore in Western Australia in review. Retrieved from
http://www.riotintoironore.com/documents/2012_in_review_FINAL(1).pdf
Sanfilippo, S., Williams, T. & Gilpin, M. (2012). Pilbara and mid-west (Western Australia) iron ore
case studies. Railway Technical Society of Australia: Engineers Australia.
West Pilbara Iron Ore Project (Aquila Resources)
27
Steffen, A., Couchman, J. & Gillespie, B. (2008). Avoiding cost blow-outs on mining capital projects
through effective project stage gating. Retrieved from
http://www.pwc.com.au/industry/energy-utilities-mining/assets/Avoiding-Cost-Blow-Outs-
Nov08.pdf
Spot 63.5% Fe iron ore prices rise to $156-157 per tone cfr (2013). Metal Bulletin, 9285, 24.
Tseng, D. (2012). Arrium sees first ore through Whyalla port. Metal Bulletin Daily, 344, 53.
Tseng, D. (2012). Fortescue delays projects, cuts jobs. Metal Bulletin Daily, 328, 101.
Western Botanical (2010), Flora and Vegetation of the Proposed Mine & Associated Infrastructure
Areas West Pilbara Iron Ore Project, prepared by Western Botanical for API Management
Pty Ltd, April 2010.
Xu, X. (2011). Iron ore market stays put as steel prices fall again. Metal Bulletin Daily, 267, 12.
Zare, M., Sereshki, F. & Aziz, N. (2008). Application of Financial Risk Analysis for Project
Evaluation at a Large Coal Mine. Research Online 2008-01-01. Retrieved from
http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1028&context=coal
West Pilbara Iron Ore Project (Aquila Resources)
28
Appendix A
Source: ASX (2010)
Appendix B
Source: Aquila Resource (2012)