November 13, 2012 / 8:31 AM / in 5 years

Australia miners need to slash costs to keep projects alive

PERTH (Reuters) - Rio Tinto (RIO.AX) said on Tuesday that Australia’s mining industry grew complacent in its race to cash in on an overheated commodity market, and the global miner predicted the industry faces widespread cost cuts now that prices have cooled.

Miners had grown “fat and lazy” after allowing their costs to follow prices higher, Australia’s resources minister Martin Ferguson said, warning this was putting at risk $230 billion worth of new resource projects.

“Even if I might object to being called ‘fat and lazy’, he makes a valid point,” Rio Tinto’s Australia chief executive, David Peever, said at a conference in Perth attended by the minister.

Miners have canceled a string of projects, shut some coal mines and slashed jobs, led by BHP Billiton’s (BHP.AX) move to shelve more than $40 billion worth of projects in copper, coal and iron ore, as commodity prices have dropped.

“There are plenty of producers on both sides of the country which have experienced this over recent months, and the rationalization will continue,” Peever said.

Rio Tinto was looking at every possible way to slash costs, he said. Last week it shelved plans to expand a workers’ village in the Pilbara iron ore region, though is pressing ahead with its $16 billion iron ore expansion to 353 million tons a year.

Rio considers its Pilbara iron ore expansion to be the most profitable development in the industry, which will allow it to supply the market when demand picks up while smaller miners have had to shelve or delay their developments.

“In other words, we get pole position in the market,” Peever said.

He cited an industry report that said new iron ore mines in Australia outside the established Pilbara operations on average cost 30 percent more to build than in the rest of the world.


The resources minister said companies needed to manage projects better in order to proceed with $230 billion worth of mining and energy developments on the drawing board, the next stage of projects following $270 billion already committed to or underway.

“It’s going to be very hard to get that second tranche (of projects),” Ferguson told reporters on the sidelines of the conference.

Western Australian Premier Colin Barnett said the mining and energy boom had just hit a bump in the road and that growth would be sustained though volatile over the next 10 to 20 years.

“The Chinese economy will not slow below 7 percent,” Barnett said, citing what he said Chinese officials had told him.

A woman runs past the reception desk of the Rio Tinto Limited Shanghai Representative Office in Shanghai March 22, 2010. REUTERS/Stringer

“We are hitched to China. But we will feel every little hiccup and cough they have.”

One of the casualties of China’s slowdown was the A$5.9 billion ($6.2 billion) Oakajee port and rail project, shelved last week by Japan’s Mitsubishi Corp (8058.T) along with the A$3.7 billion Jack Hills iron ore project, as it was unable to line up a partner to help with funding.

Barnett said he expected Oakajee to be delayed by two to three years, but was confident the development would go ahead.

“I wouldn’t write Oakajee off. There’s 13 billion tons of magnetite iron ore in that province, there’s probably over $3 billion in mainly Chinese investment in the area,” the state premier told reporters.

Western Australia would pursue talks with Chinese state-owned enterprises to develop the port and rail project, he added.

    “The project doesn’t all have to happen in one go, it can be staged... There’s also scope to build a port, initially, of a lesser standard,” Barnett said.

    For example, the port could operate for 250 days a year and grow with market demand instead of operating all year round, he said.

    Oakajee is one of several ports the state had hoped would be up and running by the middle of this decade but it has suffered from a reluctance by Chinese companies to invest offshore after facing long delays and massive cost overruns.

    Western Australia has the country’s fastest growing economy, thanks to A$167 billion in mining and gas projects, but it is facing a slowdown as miners shelve developments, hit by soaring costs, uncertain demand and a persistently strong Aussie dollar.

    One of the state’s major potential projects is Woodside Petroleum’s (WPL.AX) Browse liquefied natural gas (LNG) development in northwestern Australia.

    Woodside and its partners are due to decide by mid-2013 on whether to build an LNG plant for gas from the Browse Basin at a controversial location called James Price Point.

    Royal Dutch Shell (RDSa.L), which has expertise in floating LNG technology, has recently lifted its stake in the project, sparking speculation that the site will be abandoned in favor of a floating LNG plant.

    “The gas needs to come onshore,” Barnett said, adding that the James Price Point site has enough space for three LNG developments in total.

    The Premier also said processing gas offshore would cost Australian jobs.

    “If it’s a floating LNG, that will be constructed entirely offshore there will be no Australian jobs at all. I would think that would be unacceptable to the Australian public,” Barnett said.

    Editing by Ed Davies

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