9 December 2014
Sector: Metals
Expert Speak
Iron ore cost curve flattens
Coking coal prices have strong support from cost curve
We hosted a conference call with Tara Dines - VP, Investor Relations Australasia, BHP Billiton
(BHP) to discuss the iron ore and coking coal businesses. BHP is undeterred by the 47% YTD fall
in iron ore prices and is set to grow production further by 25mt to 270mt with no fixed asset
investment, and to 290mt with marginal capex. The cost of production is set to fall 25% to
below USD20/t fob (excluding royalty), while the iron ore cost curve is expected to flatten.
However, the coking coal side of story is slightly different. BHP is currently not inclined to
allocate further capital to grow coking coal volumes as prices have fallen close to cost of
production. At current coking coal prices, more than 50% of the seaborne supplies are making
cash losses. We believe there is further downside to iron ore prices, while coking coal prices
now have a strong support from the cost curve (refer our
NMDC note
dated Nov 27, 2014 and
"Downhill Run"
dated Aug 2012).
BHP Billiton (MCap:
USD156b) is an Anglo-
Australian multinational
mining, metals and
petroleum company
headquartered in
Melbourne, Australia. It is
the world's largest mining
company measured by
2013 revenues
Iron ore: production growth undeterred; cost curve flattens
Western Australia Iron Ore (WAIO) production in AFY2014 (Australian financial year
from July 1, 2013 to June 30, 2014) increased ~20% YoY to 225mt (100% basis). BHP’s
iron ore operations comprise of 85% stake in WAIO (Australia) and 50% stake in
Samarco (Brazil).
WAIO production is expected to increase by 20mt to 245mt (100% basis) with the tie-
in of ship loader 2 expected to be completed before Dec 2014. Further growth in
supply chain capacity to 270mtpa (100% basis) is expected to be achieved without
the need for additional capex. Beyond that, the Inner Harbor debottlenecking and
Jimblebar Phase 2 projects have the potential to increase total capacity to 290mtpa
(100% basis) by end-FY17 at very low capital cost. Sustenance capex is expected to be
at USD5/t.
There has been no new major iron ore project approval after 2011. Production growth
will be driven by improving efficiency of existing facilities, infrastructure de-
bottlenecking and ramp-up of production from newly-commissioned mines
(Jimblebar).
BHP is increasingly focusing on cost and capital efficiency. It targets to achieve unit
Fob iron ore production cost (excluding royalty and sea freight) below USD20/t in the
medium term. In 2HAFY14 (or 1HCY14), it achieved unit cost reduction of 12% to
USD25.89/t.
Lower unit production cost will be driven by (a) better fixed cost absorption through
higher volumes – ~25% of the savings, (b) improving people productivity, (c) contract
re-negotiation and (d) in-sourcing, better utilization of logistics and infrastructure
facilities and others.
Increase in supply by low cost seaborne suppliers will lead to displacement of high
cost producers and thus flattening of the cost curve. Low cost seaborne supply is
estimated to have displaced ~80mt of Chinese iron ore capacity.
China’s long term steel demand outlook remains robust. China’s steel demand is
expected to increase to 1-1.1bt by 2020 from ~0.8bt in 2013.
New supply of
20mt in AFY15 and
another 45mt over
AFY16 and FY17
Fob costs to fall
25% to under
USD20/t
Cost curve is
flattening
Sanjay Jain
(SanjayJain@MotilalOswal.com); Tel: +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); Tel: +91 22 3027 8033
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Expert Speak
Caval Ridge will
more than offset
the recently-
closed mines
Coking coal: focus on cost reduction than volumes
BHP has guided that AFY15 coking coal production will increase 4% YoY to 47mt
aided by rampup of recently-opened Caval Ridge mine. It has already closed the
high-cost and loss-making capacity at Norwich Park and Gregory.
Coking coal unit production cost is down by ~37% in the last two years to ~USD100/
t in FY14. It targets to further reduce the unit cost (including royalty/freight) to
USD90/t. Unit cost reduction will be driven by (a) improving people productivity –
has reduced its total labor spend by 23% in AFY14, (b) higher equipment availability
and (c) in-sourcing, contract re-negotiation and other initiatives.
At current coking ore prices, more than 50% of the seaborne suppliers are incurring
cash losses. Around 21mt of coking coal capacity has already been cut due to
unfavorable prices. US export stickiness is weighing on global coking coal prices.
Strict focus on cost
reduction
50% of seaborne
suppliers are
incurring cash losses
Exhibit 1: Drivers of iron ore unit cost decline
Source: Company, MOSL
Our view: iron ore at USD60/t and coking coal at USD108/t
We continue to believe that strong growth of low cost iron ore supply from BIG4
(Vale, Rio Tinto, BHP Billiton and FMB) will keep flattening the cost curve. Further,
the cost curve is shifting down. This will keep the pressure on iron ore prices, especially
when the Chinese steel or more correctly the pig iron (hot metal) production is
stagnating. We maintain our view that iron ore prices are heading towards USD60/t as
highlighted in our
NMDC note
dated Nov 27, 2014. Coking coal prices have limited
downside and we maintain our estimate of USD108 as highlighted in our report
“Downhill Run”
dated Aug 2012.
9 December 2014
2

Expert Speak
Annexure 1: Description of iron ore business
BHP’s assets consist of the 85% stake in WAIO and 50% stake in Samarco, Brazil.
Western Australia Iron Ore (Australia)
Operations at Western Australia Iron Ore (WAIO) involve an integrated system of
mines and more than 1,000 kilometres of rail infrastructure and port facilities in the
Pilbara region of northern Western Australia, with the headquarters located in Perth.
BHP plans to continue to grow production following the recent completion of a number
of expansion projects and ongoing debottlenecking of the supply chain to underpin
further potential growth in capacity to 290mtpa. BHP’s share of FY2014 production
was 193 Mt of ore, which is expected to increase in FY2015 to 211 Mtpa.
Exhibit 2: Map of Western Australia Iron Ore
Source: BHP-Billiton
WAIO operations
consist of four main joint ventures:
Mt Newman, Yandi, Mt
Goldsworthy and Jimblebar. BHP’s interest in the joint ventures is 85% with Mitsui
and ITOCHU owning the remaining 15%. The joint ventures are unincorporated except
Jimblebar, where BHP diluted its interest in a subsidiary company to 85% in July 2013
for which BHP Billiton received total consideration of USD1.5b.
The
Mt Newman
Joint Venture consists of a number of ore bodies joined by conveyors
and spur lines to a mining hub at Mt Whaleback. Ore is crushed, beneficiated (where
9 December 2014
3

Expert Speak
necessary) and blended to create the Newman Blend for lump and fines. The ore is
then transported to port using company’s rail facilities.
The
Yandi
JV comprises the Yandi mine where ore is crushed and screened and then
transported by rail on the Newman main line.
The
Mt Goldsworthy
JV consists of the Area C mine in the central Pilbara and the
Yarrie mine in northern Pilbara. Ore is crushed and screened at Area C and transported
by rail to the hub at Mt Whaleback. Production at Yarrie was suspended
on Feb 25, 2014.
The
Jimblebar
operation was officially opened on Apr 23, 2014 and comprises the new
Jimblebar mine located 40 kilometres east of Newman. Jimblebar delivered first
production in the September 2013 quarter and produced 9mt during FY14.
Rail operations
are controlled from Perth via integrated remote operations centre
which co-locates rail control, port production control, mine dispatch control and mine
fixed plant control.
Port facilities
are located on both sides of the harbor at Port Hedland. These facilities
consist of Nelson Point and Finucane Island. The port facilities include five ore car
dumpers, three screening plants, nine stackers, five reclaimers, stock and blending
yards, and eight ship loaders. The reserve life of our Western Australian mines is 16
years.
Samarco (Brazil)
BHP is a 50-50 joint venture partner with Vale at the Samarco operation in Brazil.
Samarco is currently comprised of a mine and two concentrators, located in the state
of Minas Gerais, and three pellet plants and a port, located in Anchieta in the state of
Espirito Santo.
Three 396-kilometre pipelines connect the mine site to the pelletizing facilities.
Samarco’s main product is iron ore pellets. Extraction and beneficiation of iron ore is
conducted at the Germano facilities in the municipalities of Mariana and Ouro Preto.
Ore beneficiation occurs in concentrators after which concentrate is pumped through
slurry pipelines to the pellet plant in Ubu, Anchieta.
Pellets are independently marketed by Samarco and sold to steelmakers in 20
countries in the Americas, Asia, Africa, the Middle East and Europe, with prices
generally linked to market indices. In FY14, BHP’s share of production was 11mt of
pellets. The reserve life of Samarco is 39 years.
9 December 2014
4

Expert Speak
Annexure 2: Description of coking coal business
Coal Business, headquartered in Brisbane, Australia, is the world’s largest supplier of
seaborne metallurgical coal, one of the world’s largest suppliers of seaborne energy
coal and a significant domestic energy coal supplier in the countries where BHP’s
mines are located.
Queensland Coal (Australia)
Queensland Coal comprises the BHP Billiton Mitsubishi Alliance (BMA) and BHP Billiton
Mitsui Coal (BMC) Assets in the Bowen Basin in Central Queensland, Australia.
The Bowen Basin is well positioned to supply the seaborne market because of its
high-quality metallurgical coals, which are ideally suited to efficient blast furnace
operations, and its geographical proximity to Asian customers. BHP has access to key
infrastructure in the Bowen Basin, including a modern, multi-user rail network, and
own coal loading terminal at Hay Point, located near the city of Mackay. BHP also has
contracted capacity at three other multi-user port facilities including the Port of
Gladstone (RG Tanna Coal Terminal), Dalrymple Bay Coal Terminal and Abbot Point
Coal Terminal.
Exhibit 3: Map of Queensland Coal
Source: Indsutry, BHP-Billiton
9 December 2014
5

Expert Speak
BHP Billiton Mitsubishi alliance (50% ownership in BMA)
BMA owns and operates open-cut and underground metallurgical coal mines in the
Bowen Basin, and also owns and operates the Hay Point Coal Terminal. BHP’s shares
50-50 ownership with Mitsubishi Development.
BMA operates the Goonyella Riverside, Broadmeadow, Daunia, Caval Ridge, Peak
Downs, Saraji, Gregory Crinum and Blackwater mines. First production commenced
at Caval Ridge in the June 2014 quarter. BHP’s share of total production in FY14 was
29.3mt. The reserve lives of mines range from 2.8 years at Gregory Crinum to 37 years
at Saraji.
BHP Billiton Mitsui Coal (80% ownership in BMC)
BMC is a subsidiary company owned by BHP Billiton (80%) and Mitsui and Co (20%).
BMC owns and operates South Walker Creek and Poitrel open-cut metallurgical coal
mines. Total production in FY14 was 8.3mt. The reserve lives of company’s mines are
15 years at Poitrel and 11 years at South Walker Creek.
Illawarra Coal (100% ownership)
Wholly-owned Illawarra Coal Asset owns and operates three underground coal mines
– Appin, West Cliff and Dendrobium, in the Illawarra region of New South Wales,
Australia. The mines supply metallurgical coal to the nearby BlueScope, Port Kembla
steelwork, and to other markets.
The Appin mine is currently being developed to sustain Illawarra Coal’s production
following the end of the mine life at West Cliff. Coal is exported via the Port Kembla
Coal Terminal, in which BHP owns a 16.67% interest.
Total production in FY14 was 7.5mt. The reserve lives of company’s mines range from
2 years at West Cliff to 25 years at Appin.
9 December 2014
6

Expert Speak
N O T E S
9 December 2014
7

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