The Profits of Iron Ore

A 101 TRAIN SPOTTING GUIDE TO PILBARA IRON ORE PRODUCTION (constructed on 2013 prices)

Here’s a perspective on how much iron ore fits into a train, how many trains are needed to deliver those tonnes to port and some related revenue, profit and royalty numbers.

[1] Approximately 110-135 tonnes of iron ore per wagon – call it 120 tonnes a wagon – 120 TAW.

[2] 100 wagons a train at 120 TAW is 12,000 tonnes of ore – that is the pay dirt.

[3] A major producer targets 232 wagons a train, at 120 TAW that’s 27,840 payload tonnes per train – call it 25,000 tonnes payload a train.

[4] For example, a new operator may like to target 25,000 tonnes payload a train for 330 operational days a year to deliver to port 8,250,000 tonnes a year. Call it 8 mtpa per one train a day per operational year.

[5] To deliver 50 mtpa would require 6+ trains a day – a train every 4 hours.

[6] A major producer endeavoring to deliver 200 mtpa requires 24 trains a day – 1 an hour.

[7] Revenue for a major per loaded train is 25,000 payload tonnes x $50-$100 (sale price) = $1,250,000-$2,500,000 revenue per train.

[8] Profit for a major being revenue minus production costs (assume cost of production is $50 per tonne) profit is $25-$50 per tonne that’s $625,000-$1,250,000 per train.

[9] Further on the producer profit side, if a major can operate at a profit of approximately $50 a tonne then a production rate of 200mtpa makes $10 billion profit a year (note it is hard to compare market prices to EBIT, most tonnes are sold on the basis of yearly pricing at a much lower price – RTIO reported $6B EBIT in H1-2011 which included significant weather related downtime).

[10] On royalties, if the royalty rate is 7.5% per tonne FOB for lump, at a production rate of 50mtpa – if sold at $75-150 a tonne – state royalty is $5.625-$11.25 per tonne and therefore yearly state royalties would be $281.25 million-$562.5 million per 50mtpa. Therefore state royalties for 200mtpa would be $1-2+ billion. When the price get to $75 a tonne (rather than $150) the WA Government misses out on a BILLION dollars per 200mtpa block of production.

[11] If the Pilbara does 400mtpa that’s $4+ billion royalty. If the Pilbara was developed to produce 1,000mtpa, that would be about $10 billion a year for state royalties (this is based on $150 a tonne so halve it for $75 a tonne).

[12] 1,000mtpa would require 125 trains a day (each 25,000 payload tonnes), that is a train every 10-12 minutes 330 days a year, over 8-10 train lines (allow for a general capacity of 100mtpa per single track train line).

[13] PS – in the West Australian on Saturday 14 June 2014 the costs of production are quoted as US$44 per tonne for Rio and $53 for BHP.

ANY QUESTIONS: aidan.kelly@matrixapprovals.com.au