Exclusive: Australia's Rinehart clears hurdles on $10 billion iron ore project - sources

SYDNEY/SEOUL Thu Jul 18, 2013 5:55am EDT

SYDNEY/SEOUL (Reuters) - Australian mining magnate Gina Rinehart's $10 billion Roy Hill iron ore project has overcome key hurdles holding up debt negotiations, a move that could pave the way for the mine to start producing by September 2015, sources said on Thursday.

Getting Roy Hill into production is likely to further boost the fortunes of Rinehart, already Australia's richest person with a net worth estimated by Forbes at $17 billion.

However, it could also add to an expected glut of the steel-making ingredient as rivals Rio Tinto (RIO.AX), BHP Billiton (BHP.AX) and Fortescue Metals Group (FMG.AX) crank up production just as demand in top consumer China is set to cool.

The 55-million tonnes-a-year project, which would make Roy Hill Australia's fourth-largest iron ore producer, has been steadily pushed back amid delays in lining up $7 billion in debt funding.

Export credit agencies (ECAs), including Export Import Bank of Korea (KEXIM), Japan Bank for International Cooperation (JBIC) and Nippon Export & Investment Insurance (NEXI) had been pressuring Roy Hill shareholders led by Rinehart's Hancock Prospecting Pty Ltd to fully guarantee that the project reaches completion, in return for up to $5 billion of loans.

The export credit agencies also sought payment guarantees for ore purchase contracts by Chinese steel mills, said a banking source familiar with the talks.

The parties have now negotiated a compromise to break the deadlock that had threatened to delay the project further in Western Australia's iron-rich Pilbara region.

"Although a guarantee from a party with strong credit would be one of the simplest ways to move the project forward in the eyes of the ECAs, it is not the only way to reduce risks," said a second source with direct knowledge of the negotiations.

"Such ways have been sufficiently agreed upon, and negotiations are moving ahead speedily," added the source, without elaborating on the agreement.

None of the sources were authorized to speak publicly about the project.

A Roy Hill spokesman said talks were advancing with export credit agencies and commercial lenders being tapped for the remainder of the loans required.

"We're cautiously optimistic we'll be able to get it wrapped up in 2013," spokesman Darryl Hockey said.

SOUTH KOREA'S STX EXITS

Aiding progress on the equity side, the weakest partner in Roy Hill, South Korea's STX Corp (011810.KS), has sold its 2.5 percent stake to another partner in the project, Marubeni Corp (8002.T).

A spokeswoman at the Japanese trading company confirmed it had increased its stake to 15 percent, but declined to comment on the amount paid.

Conglomerate STX first invested in the Roy Hill project in 2010 and last year paid $200 million to take up a 2.5 percent stake, but sold out as it faced a cash crunch following a downturn in its shipping and shipbuilding business.

Rinehart's Hancock owns 70 percent of the project, with South Korean steel giant POSCO (005490.KS) holding 12.5 percent, Taiwan's China Steel Corp (2002.TW) 2.5 percent and Marubeni the remainder.

"We have equity partners who continue to provide the necessary funds for us to advance the project," Roy Hill spokesman Hockey said, declining to comment on STX's exit.

Work on Roy Hill is well underway, with a small airport already open with a runway big enough for a Boeing 737 aircraft. Construction has also started on a village to house 1,200 workers and dredging for its two deepwater berths has been completed at Australia's biggest iron ore port, Port Hedland.

First production due in 2015 may kick off just as the iron ore market suffers a glut that analysts expect will push prices, which approached $190 a tonnes two years ago, to below $100.

But thanks to the quality of Roy Hill's ore and relatively low cost base, prices are not the overriding concern for lenders.

Nonetheless, export credit agencies wanted extra financial guarantees from the shareholders in the event of Chinese steel mills breaking purchase agreements, according to the first banking source.

As recently as last year, Chinese buyers of Australian iron ore reneged on deals as demand and prices crumbled, trade sources had previously told Reuters.

Another potential concern lenders could have is around the size and complexity of the project, said Ben Farnsworth, a partner at law firm Allens Linklaters, who has worked with export credit agencies but is not involved in Roy Hill.

Hancock is a 50:50 shareholder with Rio Tinto in another Pilbara iron ore mine, but neither it nor its partners have ever built or operated a mine or infrastructure of this scale.

(Additional reporting by Aaron Sheldrick in TOKYO, Sonali Paul in MELBOURNE and Jackie Range in SYDNEY; Editing by Lincoln Feast and Ed Davies)