You can blame Gina Rinehart for our latest little resources rush.
In the two months since the start of December 2010, more than 30 mining and resources companies have listed on the Australian Securities Exchange. There are another 22 resources companies that have lodged applications to float in the coming months.
That there would be so many resources companies looking to list – and so many investors willing to back them – might appear strange.
That is, until you look at the incredible rise of the resources barons on the Forbes list of the 40 richest people in Australia.
While much has rightly been made of Gina Rinehart’s crowning as Australia’s richest person, equally amazing is the valuation attached to her entry – a staggering $US9 billion.
According to the Forbes list, the Rinehart fortune has climbed from $2 billion to $9 billion in the past 12 months. (Disclosure – I worked on valuations for Forbes, although not Rinehart’s.) However, that has as much to do with Forbes taking an overly conservative view of Rinehart’s mining operations last year as it does with the impact of rising commodity prices and production.
Still, the sheer amount of cash flowing through Rinehart’s empire is incredible.
Rinehart gets a 1.25% royalty from all iron old sold by Hamersley Iron (the Rio Tinto subsidiary operating in the Pilbara) which is delivering somewhere around $170 million a year.
On top of this, Rinehart gets 50% of the profits generated at the Hope Downs mine, which is also run by Rio Tinto. At current production levels (30 million tonnes a year) and current prices (which have almost doubled in the last 12 months to around $US140 a tonne) her stake is generating over $2 billion in revenue, and, at a very conservative estimate, as much as $700 million in net cash for Hancock Prospecting.
It is this sort of cash – $870 million a year – that fills mining entrepreneurs and investors with hopes and dreams. The rewards for success in the sector are now so astronomical that even the most marginal projects have the chance to make their backers very, very rich.
It’s not just Rinehart’s rise that underlines the incredible riches in the sector.
Andrew Twiggy Forrest’s fortune soared from $US4.1 billion to $US6.9 billion thanks to the soaring share price of Fortescue Metals Group.
Kerry Stokes jumped from $US780 million to $1.9 billion, largely because he was able to unlock the value of the Westrac business.
Angela Bennett and Michael Wright (who also have a share of the Hamersley Iron ore royalty) saw their fortune rise by $US570 million.
Queensland coal entrepreneur Chris Wallin, Perth’s Tony Poli and young miner Nathan Tinkler all joined the list, with $US2.8 billion between them.
Even excluding Rinehart’s wealth rise, that’s $7.3 billion of new mining money that’s been added to the list in 2011.
It could be said that these relatively new resources riches are changing the make-up of Australia’s wealth rankings.
For most of Australia’s history, our richest entrepreneurs have become wealthy by selling things to their fellow citizens – selling food and media content, building shopping centres and homes, making cardboard boxes.
With the rise of Rinehart and Forrest – who combined have almost $22 billion – the focus is on selling to the world.
The big question is: Can it last?
It’s worth remembering that less than a decade ago, the Hamersley Iron royalty currently paying Rinehart about $170 million a year was bringing her just $10 million a year.
No matter how different the cycle is this time with China and India, seasoned veterans like Rinehart and Forrest know commodity prices can go down as quickly as they go up.
While iron ore spot prices are running at $US170 a tonne, the consensus is for prices to drop sharply over the longer term, falling as far as $US60 a tonne by 2015 as new supply comes onto the market.
Even with production at current levels, a drop in prices of this magnitude would still see over $400 million pouring into Rinehart’s coffers annually.
The value of her fortune would of course drop to take into account this fall in revenue. But what remains unclear is whether Rinehart can expand her empire over the next few years to take her fortune even higher.
There are three projects on Rinehart’s drawing board.
The Roy Hill project in the Pilbara would see Rinehart develop a mine as big, if not bigger, than Hope Downs. It has been presumed the project would be built in a joint venture with a big miner, but this remains to be seen. Korean steel giant Posco has taken a stake in the project, and Rinehart has previously said she was looking for a Chinese investor to help develop the mine, rail and port infrastructure.
Construction of the railway had been scheduled to start in 2011 with production kicking off in 2014, when what has been described as a “wall” of iron ore supply is expected to come onto the market. Whether this worries Rinehart or not remains to be seen.
The other two projects are located in Queensland’s thermal coal-rich Galilee Basin. The Alpha and Kevin’s Corner projects have a combined end value of $15 billion, and Rinehart is expected to sell stakes in both to get finance.
The Alpha project is also expected to start shipments in 2014, which underlines the dramatic expansion Rinehart’s empire looks set to undergo in the next three years.
Can she pull it all off? It will clearly be her greatest entrepreneurial challenge, but Rinehart certainly has the financial firepower to succeed.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
Comments