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Arrium eyes mining, but Australia’s richest lose billions

Arrium (ASX: ARI) continues a resilient push into mining through its iron ore projects in South Australia, but fortunes are fiercely fading for those already in the industry.

Tuesday, Arrium released its quarterly production report, which showed that shipments from its Southern Iron mine in South Australia rose to 1.97 million metric tonnes, up from 1.82 million tonnes. The figures come as the company said it will be expecting to reach between 8.2 and 8.4 million tonnes for the year to June 30.

Arrium’s resilience comes from its reliance on the industry, particularly Chinas demand for Iron ore. For the half year ended 31 December 2012, Arrium reported a net loss of $447.2 million. The move to up its exposure to the mining sector and mining consumables was a strategy to diversify away from domestic construction and infrastructure.

Did they get it right?

With the local construction industry in a lull and many mining companies like Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and Whitehaven Coal (ASX: WHC) already trading at near four-year lows, it has to be asked if Arrium got it right.

If we look at the people who have massive amounts invested in Whitehaven, Fortescue and Hancock Prospecting, it’s obvious to see what’s happening in the industry. A report compiled by Fairfax Media (ASX: FXJ) shows that Australian mining magnates have lost $11 billion in one year.

Topping the list of losers was Gina Rinehart, whose wealth tumbled 25% to $22 billion from last year. Fortescue’s Andrew Forrest also lost a major stake in his previous $3.7 billion after a sharp drop in iron ore prices lead his wealth to a current level of $2.2 billion. Nathan Tinkler, who owns 19% of Whitehaven, didn’t even make the list because his wealth slumped from over $915 million to $235 million.

Foolish takeaway

Arrium had to do something to avoid amassing an even bigger loss this year, but questions surround its “diversification” strategy. Perhaps a move away from mining and in particular steel, would have been more appropriate to help recoup some lost profit. However, no doubt the mining division will complement its other businesses and secure precious revenue. But with bigger players like Rio and BHP Billiton (ASX: BHP) able to supply the same product cheaper, the company will be sure not to not rely upon the projects — therefore shareholders shouldn’t either.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto.

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