Gina Rinehart is a couple of months away from turning a shovel at her new Roy Hill project but iron ore’s price fall to decade lows could have it close to unprofitable.
Prices of Australia’s biggest export earner plummeted more than 10 per cent to $US44.10 a tonne on Wednesday night, their lowest level in 10 years.
The drop means that, along with Fortescue Metals, Australia’s next two biggest iron ore companies after the global giants Rio Tinto and BHP Billiton are barely profitable.
The commodity has been caught up in the fallout from China’s massive sharemarket plunge.
While Mrs Rinehart is on track to realise her magnate father Lang Hancock’s dream of operating a mine, succeeding and turning a profit is looming as a difficult challenge.
Her private company Hancock Prospecting has not released cost guidance for more than two years.
A spokesman on Thursday said the company was confident the currently 80 per cent complete Roy Hill “would be robust in most pricing environments”.
UBS analyst Glyn Lawcock estimates Roy Hill’s breakeven iron ore price at $US41 a tonne.
However that increases with interest charges from the debt-funded $13 billion project, due to start producing in September.
Dr Lawcock thinks Roy Hill is a viable project that will ultimately work.
It is Australia’s biggest single iron ore mine and will add 55 million unwanted tonnes to global trade, but is difficult to analyse because private companies are not required to disclose information.
“It is unproven yet whether they can deliver the cost structure they are guiding from a couple of years ago,” Dr Lawcock told AAP.
“The industry would suggest costs have come down: energy prices are lower now, contractors and miners work a bit cheaper.”
Mrs Rinehart, Australia’s richest person, recently asked workers to take a five to 10 per cent pay cut.
A week of dramatic falls in the iron ore price are viewed as an overreaction, but the rebound back to $US60 since April was also artificial.
Dr Lawcock attributed iron ore’s falls to the suspension of trading in about half of China’s listed stocks.
Investors with cash stuck in those stocks were grabbing money wherever they could, including selling iron ore, he said.
While there is a good chance of iron ore quickly rebounding above $US50, it is not expected to get much higher, with the Australian government predicting prices in the short term of about $US50 and Citi tipping a fall to below $US40.
Supply is increasing and demand is falling and that is bad news for struggling smaller higher cost producers such as Atlas Iron, which is trying to raise $180 million.
Dr Lawcock said August’s earnings season would be important to see if Rio and BHP – the world’s second and third largest producers – stayed committed to expanding.
Morningstar analyst Mathew Hodge said the temporary rally in prices in May and June had delayed the inevitable for smaller high cost miners who could no longer compete.
“Would I invest more new money into that sort of scenario, I don’t think so,” he said.