FORTESCUE, which reported record production levels this morning, hauls ore from Nullagine to Port Hedland. Discovered by BC Iron in 2007, Nullagine entered production in late 2010, reporting record half year sales of 3.1m tonnes this week. 

FORTESCUE, which reported record production levels this morning, hauls ore from Nullagine to Port Hedland. Discovered by BC Iron in 2007, Nullagine entered production in late 2010, reporting record half year sales of 3.1m tonnes this week. 

Morgan Ball: Cash Flooding in from Nullagine

Issue 71, January 2014

“We’d like to increase size,” says BC Iron’s managing director, Morgan Ball, “but the key point is, not at all costs.”

Like Rio Tinto and BHP, BC Iron is enjoying record iron ore volumes and a healthy seaborne price. Unlike its peers in the Pilbara, BC has a proven record of aggressive shareholder returns, with tonnage growth secondary to cash generation.

Nullagine, the company’s only mine, is 25 per cent owned by industry giant Fortescue after BC swapped half the deposit for rail access to Port Hedland. Widely criticised at the time, the deal cut BC in on the Pilbara’s railway monopoly, positioning it to crank up its ownership to 75 per cent when Fortescue hit balance sheet troubles in 2012.

Plumping for cash flow over full ownership of the deposit, BC’s private equity-type zeal for cash returns has seen the company hold off on further acquisitions, instead squeezing costs and extending the mine life at Nullagine. “We’ve got a 7-year mine life,” says Ball, “and we think it’ll stretch to 9 to 10 years at least.”

Nullagine is operating at 6m tonnes per annum, with full capacity of 6.5m tonnes tempered by a run rate of 4.5m tonnes during the Pilbara’s wet season, January to March. The mine threw off A$89m ($78m) in operating cash flow in the last quarter, funnelled into paying down debt ahead of schedule, with A$68m outstanding.

Last year, the company paid out 60 per cent of net profits in dividends, putting its A$618m market cap on a 7 per cent dividend yield. Ball is adamant in saying that unless the right deal emerges, BC will simply wind down, returning money to the market.

“Notwithstanding, we have a pretty handy balance sheet, we’re very happy just mining and packing up,” he says. The patience affords doubly strict criteria in looking for new assets and with cash of A$197m, only adds to BC’s treasury.

Assuming peers turn talk of shareholder returns into tangible results, BC Iron is a forerunner for the rest of the industry. But whilst BC has held to the strategy throughout a bull market, positioning it to capitalise on current distress, latecomers may end up refusing growth precisely when it is cheapest.

“The board and management are capable of making this company bigger and I’d like to think that we will,” says Ball, “but we’ll only do it on our own terms."

“We’ll only do it on our own terms.”

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