BHP Billiton Aims to Overtake Rio Tinto as Cheapest Supplier of Iron Ore
Iron ore prices may be diminishing but that’s not stopping BHP Billiton’s (ASX:BHP) (NYSE:BHP) desire to be the world’s cheapest supplier.
The Australian-based company, which is currently the third-biggest producer of iron ore, is looking to cut its production costs by more than 25 percent and squeeze more tons from its iron ore mines as it seeks to overtake rival Rio Tinto (LSE:RIO) (NYSE:RIO) as cheapest supplier.
On Monday, BHP outlined an aggressive three-year expansion and cost-cutting plan to increase exports by 65 million tons over the next three years. If the plan works, it would see BHP exporting 290 million tons of iron ore by June 2017, up from the 225 million tons exported in 2014. It would also see the company producing at cheaper levels than Rio Tinto.
"We aim to be the lowest-cost supplier to China on an all-in cash basis," Jimmy Wilson, the head of BHP’s iron ore division, said in a video conference.
"The name of the game in the past was volume above and before everything else. Now cost is much more important and we are finding a lot more opportunities.”
Although BHP did not reveal a cost for the project, the company disclosed the expansion could be completed with a “capital intensity” of $30 per ton, implying a cost of about $1.95 billion.
When asked how his objective to be the lowest-cost supplier in China compare with Rio’s growth plans, Wilson said only time will tell.
"We are acutely aware that Rio is not going to stand still either, they are a great organization and they have opportunities," he said. "Rio is going to improve their business, we are going to improve our business, we believe that we have some sustainable advantages, and our aspiration is to be down the bottom end of that cost curve. I'm sure they have the same aspiration ... time will tell."
According to UBS analyst Glyn Lawcock, BHP Billiton’s cost guidance and expansion cost estimate were well below market expectation and would increase the company’s valuation by about $7 billion, or $1.30 a share.
"However, we suspect today’s announcement may see the market focus on long-run iron ore price downside risks given falling capex/costs.”
As the battle for supremacy rages on between Rio Tinto and BHP, the company said it would continue to accelerate production even if iron ore prices keep falling, which analysts expect to happen.
"We continue to see healthy demand growth for iron ore in the mid-term as Chinese steel production is expected to increase by approximately 25% to between 1-billion and 1.1-billion tons in the early to mid-2020s," said Wilson.
"We will continue to squeeze the lemon because at the end of the day it’s just so value accretive."
Vale invests $150mn to extend life of Manitoba operations
Vale has announced a $150mn CAD investment to extend current mining activities in Thompson, Manitoba by 10 years while aggressive exploration drilling of known orebodies holds the promise of mining well past 2040.
Global energy transition is boosting the market for nickel
The Thompson Mine Expansion is a two-phase project. The announcement represents Phase 1 and includes critical infrastructure such as new ventilation raises and fans, increased backfill capacity and additional power distribution. The changes are forecast to improve current production by 30%.
“This is the largest single investment we have made in our Thompson operations in the past two decades,” said Mark Travers, Executive Vice-President for Base Metals with Vale. “It is significant news for our employees, for the Thompson community and for the Province of Manitoba.
“The global movement to electric vehicles, renewable energies and carbon reduction has shone a welcome spotlight on nickel – positioning the metal we mine as a key contributor to a greener future and boosting world demand. We are proud that Thompson can be part of that future and part of the low carbon solution.”
Vale continues drilling program at Manitoba
Coupled with today’s announcement, Vale is continuing an extensive drilling program to further define known orebodies and search for new mineralization.
“This $150mn investment is just one part of our ambitious Thompson turnaround story. It is an indicator of our confidence in a long future for the Thompson operations,” added Dino Otranto, Chief Operating Officer for Vale’s North Atlantic Base Metals operations.
“Active collaboration between our design team, technical services, USW Local 6166, and our entire Thompson workforce has delivered a safe, efficient and fit-for-purpose plan that will enable us to extract the Thompson nickel resources for many years to come.”
The Thompson orebody was first discovered in 1956 by Vale (then known as Inco) following the adoption of new exploration technology and the largest exploration program to-date in the company’s history. Mining of the Thompson orebody began in 1961.
“We see the lighting of a path forward to a sustainable and prosperous future for Vale Base Metals in Manitoba,” said Gary Annett, General Manager of Vale’s Manitoba Operations.