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BHP's South Flank iron ore development promises high-grade boost, executive says

Unfazed by its competitors' recent moves on Atlas Iron Ltd., BHP Billiton Group said the lift in average iron ore grade to 62% when its South Flank project starts production in 2021 will provide a huge boost for the miner, particularly given its "leaner" operations than Yandi, which its production will replace.

BHP Minerals Australia Operations President Mike Henry told reporters on a June 15 conference call that he was going to have his "hands full in the next few years" ensuring South Flank, for which it just approved US$2.9 billion in funding, improves the underlying business rather than following Fortescue Metals Group Ltd. and Hancock Prospecting Pty Ltd.'s moves in making significant investments in Atlas.

More pressing for Henry was South Flank in the central Pilbara region of Western Australia, which is the only investment of its size in the next decade for BHP and is at the heart of a much larger resource base that promises significant upside beyond its 25-plus-year mine life.

While BHP's initial announcement of the finance decision said South Flank would contribute to an increase in the miner's Western Australia iron ore average iron grade from 61% to 62%, Henry said the low-grade 58% "or thereabouts" Yandi product would be replaced with grade as high as 63%, thus securing the 62% index going forward.

He said BHP's long-stated belief has come true, that over time, China would move more of its blast furnace steelmaking capacity to the coast and look at bigger blast furnaces, which, combined with a strong focus on the environment, would mean the demand for high-quality ore and coking coal would increase and strengthen over time.

This has led to a widening of premiums for lump, higher iron content and greater penalties for impurities.

Henry said this was a key factor in choosing South Flank over other options to approve the financing, particularly given BHP's belief that "a good portion let's say two-thirds" of the market's shift to high-grade iron ore is structural, and that will continue over time.

BHP expects South Flank's higher grade will, overall, be "quite significant" for its portfolio, along with the fact that BHP will lift the lump proportion by about 10% from 25% to 35%, "and lump secures pretty significant premiums," Henry said.

South Flank also has relatively low phosphorous compared to some of the other options that were available to BHP, and phosphorous is one of the impurities that incurs a price discount.

Leaner operation with fewer employees

Henry said the "leaner" operations planned for South Flank on several fronts had contributed to less staff, but not all of that was attributed to increasing automation, which has triggered fears of job losses across the industry.

Yandi employed over 700 people, while South Flank will need more than 600 ongoing operational roles after the 2,500 required for construction.

"Initially, when we get South Flank going, the truck fleet won't be fully automated but will be later on [as] reflected in the 600 roles. We'll also be going live with fully automated drills, but that's already the case for [much] of our business," Henry said. "In designing the plant and equipment, we focused on ensuring easy access to infrastructure for maintenance, with lots of movable components to also speed up maintenance and make it safer. All of that combined means that to get the same 80 million tonnes of production, you don't quite need the same number of people."

While Deutsche Bank and others recently said they expect Chinese iron ore imports to peak in 2019 with increasing use of scrap, Henry implied that was not necessarily a bad thing.

"Our view is that Chinese demand won't necessarily peak next year, but the broad thesis that in due course, Chinese demand will plateau or peak then move into gradual decline we've been forecasting for five to 10 years now. We believe that will happen early to middle of next decade," he said. "Scrap is coming from tearing down old buildings and machines reaching the end of their useful life and is being released because new demand is being delivered, because tearing down buildings gives you scrap but also creates new demand for high-quality steel."