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Gina Rinehart’s Roy Hill ships first iron ore

cargo ship

Billionaire Gina Rinehart, Australia’s richest woman, has seen the first iron ore from the $10 billion Roy Hill project loaded onto a ship at Port Hedland on Thursday.

The Roy Hill iron ore deposits were discovered by Hancock Prospecting, Ms Rinehart’s company in the early 1990s.

At that time I did not realise this would be the deposit of iron ore that allowed me to fulfil my father’s and my dream to be an operator-owner,” she said.

It’s the first iron ore mine owned and operated by Hancock Prospecting. Previously, the company had just received royalties from mining giant Rio Tinto Limited (ASX: RIO) and a share of the profits from the Hope Downs mine, operated by Rio.

Roy Hill could also have begun its life at the worst possible time. The mine is expected to produce 55 million tonnes of high-grade iron ore annually when running at full steam, which is expected to be within 15 months. Mine life is estimated at more than 20 years.

But spot iron ore prices have plunged below US$40 a tonne amid a global glut of supply and falling demand from China. Roy Hill may be protected from lower prices and lower Chinese demand, with 50% sold to its Joint Venture partners, South Korean Steel producer POSCO, Japan’s Marubeni and Taiwan’s China Steel Corp in long term contracts. Hancock Prospecting owns 70% of the mine, with the remaining 30% owned by the three venture partners.

The remaining half of production is expected to be sold to China with CEO of Roy Hill Holdings Pty Ltd, Barry Fitzgerald telling Fairfax Media, “We also have significant commitments from steel mills across Asia for a large portion of the remaining sales volume.

Citibank analysts have labelled Roy Hill’s new production as an ‘impending whale’ on the seaborne supply of iron ore, which could see iron ore prices fall even further.

Already BC Iron Limited (ASX: BCI) has gone into a trading halt, pending a decision over its joint venture Nullagine mine with Fortescue Metals Group Limited (ASX: FMG). A worst case scenario could see shares never resume trading.

A host of smaller producers – with higher operating costs – including Atlas Iron Limited (ASX: AGO), Mount Gibson Iron Limited (ASX: MGX), Arrium Ltd (ASX: ARI) and Grange Resources Limited (ASX: GRR) are at risk of being forced to close down if iron ore prices continue to fall.

Foolish takeaway

The first shipment of ore is good news for Hancock Prospecting and Gina Rinehart, but not so good news for smaller, higher cost producers.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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