Risk Factors For Brazilian And Australian Iron Ore Miners

by: Sarita Pereira


The major iron ore miners in Brazil, and Australia face risks due to production capacity expansion, iron ore price decline, steel overcapacity in China, and change in China's policy.

The risk exposure for major iron ore miners in Brazil, and Australia depends upon their earnings from iron ore, leverage, and China's contribution to their revenue.

The risk factors can affect their margin, credit rating, share buyback, and debt reduction program.

In this article, I will discuss risk factors that could affect the business of major iron ore miners in Brazil, and Australia, followed by the risk exposure and impact. The risk factors are mentioned below:-

1) Production capacity

China consumes two-thirds of the world's sea traded iron ore. The country meets 70% of its iron ore consumption from Brazil, and Australia. BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Fortescue Metals Group (OTCQX:FSUGY), and Vale (NYSE:VALE) are expanding production capacity at their existing iron ore project anticipating the rising demand from China.



Production capacity target

Rio Tinto

Western Australia

290 million tonnes per annum or Mtpa by mid 2014. 360 Mtpa by first half of 2015


Carajas, Brazil

450 Mtpa by 2018 from existing 306 Mtpa

BHP Billiton

Western Australia

220 Mtpa by late 2014. Further expansion to 270 Mtpa

Fortescue Metals Group

Western Australia

155 Mtpa by the end of March 2014 from 55 Mtpa in fiscal year or FY 2012

By 2018, the production capacity of these four miners will be over 1.23 billion tonnes. China's iron ore import is estimated to reach 1 billion tonnes till 2018. There are few iron ore projects by other miners, which will come online and add further production capacity in Brazil and Australia.




Production capacity

Sino Iron project

CITIC Pacific Mining

Western Australia

Upgrade to 70 Mtpa

Roy Hill project

Hancock Prospecting, Posco, and China Steel Corporation

Western Australia

55 Mtpa. First shipment by 2015

Minas Rio

Anglo American


26.5 Mtpa. Production begins in second half of 2014

If there is iron ore oversupply or China's consumption declines in the coming years, then iron ore miners in Brazil, and Australia could face under utilization of production capacity.

2) China heading towards Africa

West Africa has untapped reserves of high-grade iron-ore. China is heading towards Africa to reduce its dependence on Australia and Brazil by importing from Chinese owned projects in Africa. I have focused on this topic in my previous article.




Production capacity


African Minerals, Tainjin Minerals and Equipment Group, and Shandong Iron & Steel Group

Sierra Leone

20 Mtpa upgraded to 35 Mtpa


China Railway Eryuan Engineering Group, and International Mining & Infrastructure Corporation


35 Mtpa for 20 years.


Rio Tinto, Chalco, and International Finance Corporation


100 Mtpa, which can be altered over 35 years. First production in December 2018

China has been lifting small iron ore shipments from Guinea-Bissau, Tanzania, Uganda, Zambia, and Swaziland. There are few iron ore projects in Republic of Congo that can produce over 50 Mtpa. Iron ore projects in Africa need investment to become operationally efficient. If they achieve efficiency, China can reduce its reliance on Australia, and Brazil for high-grade iron ore. This will increase iron ore supply, which can hamper iron ore prices further.

3) Iron ore price decline

In February 2014, iron ore price has touched a low of $119.90 per tonne. Goldman Sachs forecasted iron ore price will decline to $108 per ton in 2014 and $80 per ton in 2015 due to oversupply. The production cost for the major Australian, and Brazilian miners are below:-



Shipment cost to China/tonne

Rio Tinto

$47 (cost to delivery)

$7 (from Australia)


$23 (cash cost)

$17 (from Brazil)

BHP Billiton

$45.84 (cost to delivery)

$7 (from Australia)

Fortescue Metals Group

$36.01 (cash cost)

$7 (from Australia)

The above miners have incurred huge capital expenditure to increase their production capacity. The declining iron ore prices can reduce EBIT margins of these miners even if they have an advantage of low cost production.

4) Steel overcapacity in China

China's steel industry has 300 million tonnes of excessive steel capacity. The industry is grappled with debt, overcapacity, and thin profit margins since few years. China is replacing old and inefficient steel capacity with new ones, but it will take few years to solve the overcapacity problem. If this problem persists then it will reduce iron ore consumption and put pressure on iron ore prices.

Risk exposure and impact


$ billion (mrq)

Total debt/Equity ratio (mrq)

Iron ore contribution

China's contribution to revenue

Total cash

Total debt

Rio Tinto




77% to earnings before interest, tax, depreciation and amortization or EBITDA in FY 2013






94.04% to Adjusted EBITDA in FY 2013

38.6% in FY 2013

BHP Billiton




52% to earnings before interest, tax or EBIT in first half of FY 2014

30% in 2013

Fortescue Metals Group




97.85% to operating revenue

97.69% in FY 2013

Rio Tinto's Simandou iron ore project gives it an edge over its Australian and Brazilian peers. However, the full production capacity of this project is about 1/3rd of its existing operations in Western Australia. If China increases its iron ore supply from Africa then this could lead to under utilization of its Australian capacity. Standard & Poor's maintains negative outlook for Rio Tinto as it expects the company's debt, costs to rise further. Rio Tinto will incur $120 to $130 per tonne for additional production from its Western Australia mines. The declining iron ore prices could impact the company's EBITDA margin, debt repayment schedule, and thus its credit rating.

Vale has advantage of being the lowest cost iron ore producer, which will enable the company to operate at lower EBITDA margin, if iron ore prices decline. Vale is spending $20 billion for Carajas mine expansion to increase capacity by 90 Mtpa from existing capacity. The company supplies iron ore to markets in Asia, Americas, Middle East, and Europe. However, the company's dependence on China can affect its EBITDA margin, if China increases iron ore imports from Africa or if China's iron ore consumption declines. Vale's Simandou iron ore project is yet to commence due to legal issues between the Guinea government and project partners.

Among these miners, BHP Billiton has less exposure to iron ore as it has diversified in petroleum, potash, coal, and copper. The company is expanding its iron ore production capacity through lower capital expenditure. The company has the lowest total debt to equity ratio among its peers, and it plans to reduce its net debt to $25 billion by June 2014. Further, BHP Billiton plans to launch a share buyback program in August 2014. Declining iron ore prices, or reduced Chinese consumption can affect the company's profit margins, which can affect share buyback or debt reduction program in the future.

Fortescue Metals Group is highly levered with high exposure to iron ore as well as China. If iron ore prices decline further or China's iron ore consumption slows down then it will affect the company's debt repayment schedule. The company had debt to capital ratio of 68% in FY 2013, which has to be improved to maintain its credit rating of Ba1.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.