Fortescue’s $1.15bn deal gets Pilbara project up and running

Fortescue Metals closed a $1.15 billion deal on Friday with Taiwanese steel firm Formosa Plastics which will see its FMG Iron Bridge project get off the ground.

Formosa will join a partnership agreement, created 14 months ago when Fortescue struck a deal with Chinese steel major Baosteel.

FMG Iron Bridge was scheduled to float on the Hong Kong Stock Exchange last year, but was put on the back burner when iron ore prices plummeted in late 2012, SMH reports.

Under the new deal, Formosa will dish out $123 million to secure 31 per cent of a new partnership with FMG Iron Bridge, and will fund the first $US527 million ($576 million) to construct the stage one of the Pilbara project.

The project, located about 100 kilometres south of Port Hedland in WA includes the North Star and Glacier Valley iron ore deposits, estimated to have a combined iron ore resource of 5.2 billion tonnes.

Formosa has also agreed to purchase 3 million tonnes of iron ore a year from Fortescue at market prices and if stage two of the FMG Iron Bridge project is approved it will participate.

The company has also agreed to make an upfront payment of $500 million to Fortescue to secure access to its port and rail assets in the Pilbara. The prepayment demonstrates customers are will to pay substantial sums to access the company’s infrastructure.

Fortescue has been considering selling off its stake in its Pilbara port and rail assets, but is also battling smaller miners who are attempting to gain access to its railway under third-party access laws.

The asset sales were earmarked amidst a high Australian dollar and low iron ore prices, a situation which sparked debt issues for the company.

But the company’s financial position has since been assisted by the Aussie dollar dropping below parity with the US and the stabilisation of iron ore prices.

Fortescue chief executive Nev Power said the deal will strengthen the company’s balance sheet and when asked it The Pilbara Infrastructure (TPI) sale would go ahead he remained non-committal, SBS reports.

“TPI transactions will only proceed on the basis that we get full market value for those assets and get it on terms that allow us to continue to operate our network efficiently,” he said.

He added that the sale of “non core assets” is helping the company meet its debt obligations with increasing speed.

Power explained that granting Formosa access to the infrastructure is completely separate to the third-party access processes, but the move does send an important message.

”What I think it does do very clearly is demonstrate the tremendous value that is in the infrastructure we built, it’s world-class infrastructure, it’s highly efficient and highly productive,” he said.

Power added that additional joint venture partners could be brought into the project, flagging Fortescue is aiming to lower its 61 per cent stake in the assets.

”We want to maintain a minority interest in the project, but with an interest now effectively at 61 per cent we do have some further opportunity, and of course we are 88 per cent within FMG Iron Bridge so there is certainly an opportunity for further investment by others in the project,” he said.

Stage one of the project is expected to take 12 months of construct, with first production expected in early 2015.

The first stage will see 1.5 million tonnes of hematite exported, with the second stage ramping up to see 9.5 million tonnes of magnetite concentrate piped to Port Hedland for export.

The deal is subject to approval from both Australian and Taiwanese regulators.$1-15bn-deal-gets-pilbara-project-up-a

Rio Tinto to Go Ahead With $5B Pilbara Expansion Despite Weak Price for Iron Ore

The world’s second-largest miner, Rio Tinto (ASX: RIO) will push through with its $5 billion plan to expand the Pilbara iron ore mine despite the lower price of iron ore in the international market. The mining giant has planned the expansion in 2011.

The decision to push through is because of Rio’s target to produce 360 million tonnes of iron ore per annual. Although shareholders had been pushing Rio to preserve the money and hold expansion, Rio Chief Executive Sam Walsh told analysts in London the Pilbara mine expansion Is inevitable, but the mining giant still needs to specify the timetable under the current plan which the Rio board will deliberate for approval in November.

He said Rio could be flexible with the planning in terms of timetable for the completion of the venture.

“What will drive the expansion will be what the market demands physically. We are going to be very rational and logical about this to ensure we are delivering value to shareholders and not just proceeding with something because it’s on the books,” Mr Walsh explained.

Analysts believe Rio would approve the Pilbara expansion before the end of 2013.

However, the plan by Rio to mine the Koodaiden deposits would likely be opposed by environment groups because it lies next to the Karijini National Park. The mine is about 100 km west-northwest of Newman, and has the potential to produce 35 metric tonnes per year which could even rise to 70 by 2030.

Rio plans to mine the area with a sequence of open cuts. Most of the puts are above the water table with only minor dewatering needed.

Iron Ore Holding gets project approval in Pilbara

Australian Mining reported that Pilbara iron ore junior Iron Ore Holdings has been given the go ahead for its Iron Valley Project mining proposal.

The WA Department of Mines and Petroleum approved the proposal for above water table mining in the central Pilbara area, along with the water licence needed for long term operations at Iron Valley. The approvals make up IOH’s responsibilities as stipulated in an agreement with Minerals Resources in February this year.

IOH announced an upgraded resource of 160 million tonnes at its Valley Project in 2009. This was 80% over the company’s earlier announcement of 88 million tonnes.

Mr Alwyn Vorster MD of IOH said that the two approvals are an important step towards the company generating revenue through the mine gate payment structure. The Iron Valley approval is the second approval for mining operations, which IOH secured in a relatively short period with the Phil’s Creek development currently under way by MIN. It is further evidence of IOH successfully executing its find, de risk and monetize strategy at relatively low risk to its shareholders.”

Mr Vorster said that “With the Iron Valley Project now advancing towards development, the next key focus for IOH will be securing Buckland Project funding solutions with a selected project partner and finalizing the Cape Preston East port lease agreements with the Dampier Port Authority.”

Source – Australian Mining

PROPERTY REPORT – July 2013: Danger time amid the upturn

by Terry Ryder


Danger time amid the upturn

With 2013 arriving like a blast of fresh air, the previous (February) edition of this report was devoted to identifying the places we would buy in this brave new world of growth property markets.

The greatest danger for investors in such a climate is becoming careless. When markets are rising and newspapers switch from their usual gloom to stories of booming prices, it’s easy to believe that you can buy almost anywhere and get growth.

We had a scenario like that a decade ago. The period around 2003 and 2004 was the last time when there was a genuine Australian property boom – a rapidly rising market that encompassed pretty much the whole country.

The rising tide rescued people who made bad investment decisions.

Property 2013 is different. This is not a boom. It’s a time of recovery and a return to growth in many markets. But not all. It’s a climate in which buyers have to be careful – and selective.

So I’m giving over this edition of the Quarterly Market Report to a theme that’s the flipside of the previous edition. This time I’m discussing the places we would avoid.


National Overview: Markets are rising – but you need to be selective

Today there are more good places to buy around Australia than at any time in the past 3-4 years.

While there were local differences across the nation, property markets generally struggled in 2010 and 2011, before moving gradually into consolidation and then recovery in 2012.

There has been a marked change in 2013, with a general upturn in the indicators which chart the course of the national property scene. Most of the capital cities are now recording price growth, led by Perth, Darwin and Sydney (although there’s a lot of confusion caused by conflicting figures from the various research sources, reported without intelligence by newspaper journalists who wouldn’t know a townhouse from an outhouse).

As was the case in 2012, many of the nation’s regional towns and cities are performing solidly this year.

But in any market conditions, no matter how strong they are generally, there are places buyers should avoid.

Contrary to the impression imparted by economists and media, there is no such animal as “the Australian property market”. There are many thousands of markets and they’re not all moving in the same direction, nor at the same speed.

Local conditions are often more influential than the underlying national factors. Last year, while most of the capital cities were still struggling to rise out of their slumps, many key regional centres showed double-digit growth – especially those with some impact from the resources sector.

The remote Queensland regional town of Cloncurry has a 35% rise in its median house price, while upmarket Double Bay in Sydney had a 35% decrease. In between those extremes were myriad markets, some of which rose a lot, while some rose a little, others experienced moderate decline and still others had big price declines.

Locations with growing populations and major infrastructure spending will tend to show growth while places without those attributes will not. Places impacted by natural disasters – Australia is the land of flooding rains, as well as drought, bush fires and cyclones – will temporarily decline while other places are unaffected.

Central Queensland provides a good example of how much markets can vary. Last year both Gladstone and Mackay showed good growth, while flood-impacted Rockhampton stagnated. This year, Gladstone and Mackay are declining – because developers have built too much new product and vacancies have risen – while Rockhampton is showing good price growth.

This means investors need to be well-informed and selective about where they buy – and what they avoid.



Adelaide and South Australia: What would we avoid this year and why?

Typical houses in Port Pirie cost around $180,000 and the median rental yield is around 6.5% – so, at first glance, it might be a candidate for one of our reports called “Cheapies with Prospects”. But while Port Pirie is a cheapie, it lacks prospects.

Port Augusta, Port Lincoln and Whyalla are all attracting their share of major new investment connected to the resources sector, but not much is being directed Port Pirie’s way. Meanwhile, the town’s lead smelter continues to cause angst over its pollution issues – lead levels are 45 times above health standards. Prices in the town keep falling. One to avoid.

We’ve never been huge fans of investing in Roxby Downs. It’s not only a one-industry town, it’s a one-company town (BHP Billiton, with its Olympic Dam mine).

Rental returns available in Roxby Downs have seldom been high enough to compensate for the high-risk nature of buying in a one-company mining town. You can get the same yields in a well-rounded regional centre or in the cheaper suburbs of a capital city.

Many investors bought in Roxby Downs while BHP was touting a $30 billion expansion of Olympic Dam but the company has sent that project back to the drawing board, because the costs were too high.

Roxby Downs has delivered solid capital growth in the past, but we find the risk-return equation generally unattractive. That may change if and when BHP resuscitates the Olympic Dam expansion. In the meantime, there are better places to buy.


Brisbane and Queensland :
What would we avoid this year and why?

As I wrote in the previous (February) edition of this report, Queensland is bristling with places with good prospects. It’s also replete with places investors would be wise to avoid.

Queensland is a place with more valid choices and more potential traps for investors than any other state or territory. The status of some locations has changed quite dramatically recently.

Gladstone, one of the state’s strongest markets over the past two years, has become a market requiring caution and careful research by investors. Property developers, excited by the massive infrastructure development and growing working population, have dived into this market and, as they so often do, they have built too many new houses – with more on the way.

Vacancies in Gladstone have risen from near zero to around 6% very quickly as a large amount of new stock has hit the market simultaneously. Rentals are falling and price growth has stopped.

We see Gladstone as Australia’s No.1 industrial city and it has a very strong future. But, in the short-term, investors need to be careful. We would be waiting to see what happens with prices over the next months before making any purchase decisions.

It’s very similar in another key Central Queensland city, Mackay. It too has seen vacancies rise rapidly, for similar reasons. In the case of Mackay, the over-building by developers has coincided with a reduction in demand caused by down-sizing in the nearby Bowen Basin coal mining province.

Moranbah, the No.1 mining town in the Bowen Basin, has been the nation’s top performer on capital growth over the past 10 years. It has achieved extraordinary growth and typical rentals last year were around $1,500 per week.

That has changed dramatically with the closure of the Norwich Park mine, deferral of some proposed coal projects and general downsizing by BHP Billiton and others. The median rental for Moranbah has halved, vacancies have risen from near zero to above 6% and prices have fallen.

Moranbah has been through all this before and will recover, but for now investors should steer clear.

Bowen is another location where vacancies have risen very quickly. At a time when new projects greatly increased housing supply, demand dropped because seasonal workers left the area, the mining industry down-sized and construction workers left following the completion of major developments.

Bowen, like Gladstone and Mackay, has a big future. The Abbot Point coal export terminal is set to undergo major expansions, costing at least $10 billion, with new rail links from the Galilee Basin mining province. That will create thousands of jobs in Bowen and those vacant properties will fill.

In the meantime, there may be opportunities to buy well, because prices are falling in the short-term.

Many of Queensland’s coastal markets which have struggled over the past 3-4 years are now moving into recovery phases, including the Sunshine Coast, Cairns, the Whitsundays and Hervey Bay. But I would not include the Gold Coast in that list. While there are signs of better times ahead for the Gold Coast, this market is constantly targeted by high-rise developers and has regular bouts of serious over-supply. With the Commonwealth Games coming up, it will no doubt happen again.



Canberra and the ACT:
What would we avoid this year and why?

We would avoid Canberra altogether. Not forever, of course, but until the picture becomes clearer.

As I have written many times, Canberra has been the most consistent capital city market for a long time. Its steady performance, boosted by low unemployment and high average incomes, has been so consistent as to be boring.

More recently, that has changed because major construction projects have been completed and workers have left town. At the same time, the Federal Government has trimmed the public service.

Wayne Swan’s latest (and probably last) Budget has advanced the down-sizing of public servant numbers. I would expect a new Liberal government under Tony Abbott to trim employment even further, given the rhetoric so far and based on the actions of Liberal state governments around the country, most notably in Queensland.

Cost-cutting will be the first order of business if there’s a new government, which appears likely based on the opinion polls.

This coincides with an over-supply of new apartments in the inner-city areas.

There are much better places to invest elsewhere in Australia at the moment, so we would be staying away from Canberra altogether until everything settles down.



Darwin and the Northern Territory:
What would we avoid this year and why?

The Northern Territory is challenging Western Australia as the No.1 growth economy and Darwin is the property growth leader among the capital cities.

Look at these numbers, showing annual rises: house rents up 23%, unit rents up 22%, home loans up 17%, investor loans up 29%, building approvals up 69% – and unemployment the lowest in the land. House and apartment prices are now following the rental trend, with plenty of growth to happen in the next 12 months.

In an environment like this, it’s easy to believe you can buy anything and get capital growth. It’s danger time for investors.

We would avoid Darwin’s downtown apartment market. In the recent past developers have generated an over-supply in that market and, given the current boom conditions, are fully capable of doing so again.

Darwin suburbs have a strong record of long-term capital growth – most average 11-12% growth per year, in terms of the rise in median house prices over the past 10 years. The only major under-achievers in that regard are the city and near-city apartment markets – because of those periods of over-supply.

We would particularly avoid large apartments. Developers learnt recently that it’s hard to shift big, expensive, three-bedroom apartments – and some re-designed projects to create smaller, cheaper units.

Darwin is an expensive market: there’s only one suburb with a median house price below $500,000 and only a few with median unit prices below $400,000. It’s a little cheaper in the City of Palmerston, the satellite city to Darwin.

We would avoid the top end of the market and concentrate our research at the cheaper end.


Hobart and Tasmania:
What would we avoid this year and why?

In the case of Tasmania, unlike all the other states and territories, it would be quicker and easier to explain where we would buy, rather than where we would avoid. There is almost nowhere in Tasmania with Hotspot credentials.

Few locations have strong population growth. Very little is being spent on new infrastructure. Major property developments are scarce. It’s hard to think a single location with the growth drivers that would encourage investors. Possibly only Burnie in the north has any potential to generate price increases.

Conversely, there are plenty of places to avoid. Queenstown in the west would be near the top of the list. This is the nearest thing to a ghost town I’ve seen, surrounded by a moonscape caused by the mining ventures of the past. I swear I saw tumbleweeds in the main street last time I was there.

Few locations in Australia have prices lower than a decade ago, but Queenstown is one. Its median house price today is around $80,000, well below the cost of building even the humblest of dwellings.

Perhaps they’ll discover oil and one day Queenstown will boom. In the meantime, look elsewhere.

A little north of Queenstown, Zeehan once showed potential as a Hotspot when new mining operations were being activated. Briefly, around 2007, the median house price rose 50% (from a very low base, well below $100,000). But that didn’t last long and in recent years the decline has wiped out all those previous gains.

Similar things have happened in nearby Rosebery. These days, both Zeehan and Rosebery have too few sales to even generate a median price. Zeehan has a handful of houses for sale, including one asking just $40,000 (needs work, apparently), and several others priced below $70,000. Residential home sites can be bought for under $10,000.

Stay away. It’s cheap for a reason..


Melbourne and Victoria:
What would we avoid this year and why?

This is a no-brainer. Melbourne’s inner-city apartment market is the No.1 “no go zone” not only in Victoria but in Australia.

The vacancy rate in the Melbourne CBD is 6.2%, according to SQM Research, and you have to go back to 2010 to find the last time it was below 4%. The market in Docklands has 7% vacancies and they have been at or above those levels since late in 2011. It’s worse at South Bank, where the vacancy rate is 9.2% – and has been above 6% since 2011.

But worse – much worse – is to come. According to property analysts Charter Keck Cramer, around 25,000 new apartments will be added in Melbourne by 2015. Currently there are 180 projects totalling 19,000 apartments under construction and another 250 projects with 16,000 apartments which are being actively marketed.

But wait, there’s more. Those figures do not include a host of other projects recently approved by controversial Victoria Planning Minister Matthew Guy – the man who gives developers direct access to the State Premier for a fee.

This adds up to the mother of all over-supplies. Developers think they will do okay by heading up to Asia to sell the stock for which there is no genuine local demand. Whichever way you cut it, Melbourne’s inner-city apartment market is heading for a massive shake-out and it will take years to recover.

Some of Melbourne’s outer suburban markets have dealt with similar problems recently. Municipalities like Melton in the north-west and Wyndham in the south-west have been targeted by developers, who built far too many houses. Vacancies have been as high as 10%.

Developers have managed to get rid of some of the surplus stock by using marketing companies who have flogged them off to unsuspecting distant investors, in both Australia and overseas. The vacancy rates in those areas are now back down to acceptable levels. But we would be cautious about buying in some of those high-population-growth precincts around Melbourne.


Perth and Western Australia:
What would we avoid this year and why?

Perth markets have exploded in the past couple of months. After a couple of years of strong rental growth and, in the second half of 2012, gradually rising sales levels, prices are now moving strongly.

Land sales have doubled in the past 18 months and home buyers are commonly offering more than the asking prices to secure properties.

An environment like this can be dangerous for investors. Twelve months ago we were advising people to buy in Perth, because major growth was brewing. The best time to buy there has passed and now there is strong competition for properties.

But this is the time when many people feel compelled to jump into the market. The herd mentality rules. Anyone buying in Perth now should set themselves a price limit and not exceed it.

Other Western Australian markets to avoid include Port Hedland and Karratha. Many have been attracted to these places because of the high rental returns, with very ordinary houses fetching above $2,000 a week.

But those sensationally high rentals have created equally monumental prices. The median house price in Port Hedland is $1.2 million, while South Hedland is $850,000. The suburb of Baynton in Karratha has a median price of $950,000.

Those very high values are sustainable only while the resources sector is pumping on all cylinders and while there remains a shortage of dwellings.

But the State Government is working hard to introduce new homes into those markets, with an emphasis on affordability. This is likely to undercut those value levels and we would be nervous if we had recently bought in Port Hedland or Karratha.

Broome is another place in the north of WA with very high prices. There were expectations that the town would receive a boost from the gas processing plant planned for nearby James Price Point, but now that Woodside has canned that idea in favour of more cost-effective options, there is not much remaining to pump up Broome’s market.


Sydney and New South Wales:
What would we avoid this year and why?

Byron Bay heads our list of “no go zones” in New South Wales. It is to NSW what Noosa is to Queensland – a highly-rated holiday destination and a highly over-rated property market.

Few places in Australia have performed as badly as Byron Bay. Its average annual growth rate in house prices over the past decade has been about 2.5%, not even keeping up inflation. Over the past five years, the median house price has fallen an average of 2% a year. In the past 12 months, it’s dropped 10%.

Byron’s unit market has been worse. The 10-year growth average has been a dismal 1.2%, with the median price dropping 8% in the past 12 months.

If one place has challenged Byron Bay as a poor performer, it’s Griffith, 570km west of Sydney. Its 10-year growth rate is almost as low, at 2.7%. But no growth has happened recently. The median price has dropped an average of 2% per year for the past five years.

Sydney’s prospects are rising this year, with an upturn long overdue. Sydney has been the great under-achiever among the capital cities, with growth rates well below the other state and territory capitals – particularly at the top end.

We would suggest people avoid those millionaire suburbs of Sydney, assuming anyone can avoid those prices, as they are very volatile markets. They do have periods when prices rise rapidly, but they tend to be brief – and often followed by equivalent decline.

To illustrate, here are the long-term capital growth rates for some of those suburbs: Bellevue Hill 4.3%, Bondi Beach 4.1%, Castlecrag 4.0%, Clontarf 1.5%, Collaroy 3.8%, Darling Point 2.0%, Dover Heights 3.4 %, Killara 2.2%, Mosman 1.8%, Palm Beach 2.4% …. I could go on, but you get the picture.

Better times may be ahead in upmarket Sydney, but long-term these places do not deliver great capital growth.

You’d be better off buying five houses in Blacktown, Cabramatta or Canley Heights than one in Mosman.



Don’t put all your nest-eggs in one basket case

One thing worse than buying a property in a dud location is buying multiple properties in a dud location.

It’s surprising how many investors own several properties, but all in the same place. I’ll never understand why anyone would do this, rather than spread their risk across diverse locations.

But I keep hearing from investors who have all their assets in one spot. A bloke I met at the Brisbane Home Show early in June told me he once owned 30 units and 16 houses in the small Queensland town of Greenvale.

Greenvale was once a boom town, but when the nickel mine closed down they tore up the rail tracks linking it to Townsville and suddenly Greenvale real estate wasn’t worth very much. The population fell from 3,000 to 150. Imagine owning 46 dwellings in such a place.

The most successful investors I know own multiple properties – but never two in the one location.