Cazaly V Rio - A Fight For Iron
Sydney Morning Herald
Thursday June 19, 2008
The combatants in the great iron ore struggle between the West Australian upstart Cazaly and the resources giant Rio Tinto over a large slab of iron ore-rich red dirt in the Pilbara are a little shy to say how many dollars are at stake, but it's billions.
The best estimate is that there is 4 billion tonnes of ore but it hasn't been proven yet. The stakes may be higher than they appear. Rio can't afford to open the floodgates to any would-be small-time mining company to pinch deposits from under its nose. The contract price of iron ore is now about $100 a tonne, but there are extraction and transport costs, to say nothing of getting the infrastructure built. But at this price, any number of mining entrepreneurs would be willing to try their luck and follow Cazaly. But it is clearly worth the effort for Cazaly; it has little to lose. A win will mean sharing the spoils with Andrew Forrest as a partner funding the development. While the Cazaly share price soared yesterday on the prospect of getting its hands on this patch of dirt, it is important that shareholders and would-be shareholders get a sense of perspective. This is not Cazaly's first land grab in the Pilbara. It tried to get its hands on the Shovelanna prospect a few years back. Many believed Cazaly had a legitimate right to the Shovelanna lease, given Rio had inadvertently failed to renew it. But the West Australian government backed Rio. The courts then supported the government's decision but ultimately tested only procedural fairness and whether the matter was within the West Australian government's jurisdiction. The Cazaly claim is different this time around. Cazaly is objecting to the granting of tenement applications on Rhodes Ridge to Rio and its joint venture partners (Hancock Prospecting and Wright Prospecting) because the joint venture did not validly renew the rights of occupancy. This is clearly a procedural matter and Cazaly has made its claim based on documents it obtained through the Freedom of Information Act. But for legal reasons Cazaly is not prepared to tell us what it has uncovered. The case is being reviewed by a special judge called the Mining Warden, and the claim is obviously being disputed by the Rio joint venture partners. Separately Cazaly is arguing that the agreement under which the Rio joint venture was given the tenements 35 years ago contemplated that mining would begin within five to 10 years. However, this point appears to be an aside rather than central. Mining has yet to start, but initial drilling is underway to prove up the resource. The reason nothing has been taken out of the ground is that there is no infrastructure in place to take the iron ore to market. And for Rio there has been much lower hanging fruit around to keep it occupied. This development of these deposits is in Rio's post-2013 plan. There was also some suggestion that the West Australian minister in charge of this area, Eric Ripper, has some discretion to support or overturn whatever decision the Mining Warden might make. There has clearly been, and will continue to be, political support for Rio and ultimately this will work against the minnow, Cazaly. In the background is Australia's richest man, Andrew Forrest. He has entered into a deal with Cazaly that essentially provides his Fortescue Metals an option to develop Rhodes Ridge if Cazaly is successful in its claim. Fortescue will give Cazaly $20 million to $100 million as an advance on future royalties from the development of the project if it gets the tenements. Once mining begins, Fortescue will pay a royalty of $1 a tonne for the first 1 billion tonnes shipped and 75c a tonne for any further ore shipped capped at 1.65 billion tonnes, with royalties not to exceed $50 million a year. For Cazaly, it is probably a long shot and one that may be even harder to win than its previous attempt. While the company is a long way from striking it rich, some shareholders would have been cracking the champagne yesterday. *** Goldman Sachs JBWere this week discovered the corporate sensitive spot, releasing a report highlighting companies with relatively high debt that needed refinancing within 12 months. Unfortunately a slip of the pen put Amcor on that list. The packaging group does have some refinancing to do later this year, but far less than Goldies suggested.
© 2008 Sydney Morning Herald