News broke late Friday that Gina Reinhart has sold out of her Fairfax stake. The blather has been that she frustrated with management. Gotti at Dad’s Army has a different take today:
If the current iron ore price decline continues into 2017 and beyond, then Gina Rinehart’s massive $10 billion Roy Hill mine project is set for very large losses when it starts production next year.
And if the reports of safety problems in the construction phase are right, then the capital costs will blow out beyond $10bn, especially if unions start playing hard ball, as they often do when there is a safety cause.
Accordingly, it makes perfect sense for Gina Rinehart to sell her Fairfax shares because additional funding will almost certainly be needed. The fact that she is unhappy with Fairfax management and can exit at a small profit makes the sale even more sensible.
…the Hancock empire is set for a nasty experience.
I have no idea what Gina’s cash flow position is. But I’ll add that Roy Hill is supposed to come on-line in Q3, assuming safety accidents don’t delay it. UBS reckoned the all-in break even was around $56 when oil was at $100 and the Aussie at 85 cents. You expect that to have fallen to low $40s now once volumes are all on-stream. At current prices there’ll be some losses as it ramps but if they were to stabilise it’d be fine reasonably fast.
However, when the iron ore price falls below $40, RIO royalties will dry up, and Roy Hill run big losses for years. It may even end up being the highest cost marginal producer when FMG collapses. Or, worse, if FMG is kept alive by the Chinese to suppress iron ore prices forever, Roy Hill could become a long run zombie mine.
