Fortesue Metals Group Slowly Undermines Australian Iron Ore Duopoly

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Researched by Industrial Info Resources (Sugar Land, Texas)--Fortescue Metals Group Limited (ASX:FMG) (FMG) (Perth, Australia) is expanding its presence on the large and robust Australian iron ore mining stage.

For many years, BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) and Rio Tinto Iron Ore Limited (Perth), a subsidiary of London-based mining giant Rio Tinto plc (NYSE:RTP) have dominated the iron ore mining of northwest Western Australia. Traditionally, the extremely high entry costs, which normally include not only the mine and process plant, but also hundreds of miles rail line and a port, have effectively kept other contenders out of the supply side of the market.

However, China's emergence as the world's largest user of iron ore and its willingness to invest in the downstream side to ensure supply (and perhaps increase competition) is changing the game in Australia.

Chinese investment allowed FMG to build the company's first mine, rail and port, which have a nameplate production capacity of 45 million tons per year. Despite a relatively short hiccup caused by the global economic downturn, China's demand for iron ore continues to increase, and FMG had always planned to expand operations to accommodate this, using Chinese money.

FMG's second phase expansion is the Christmas Creek Mine and Process Plant, a US$305 million investment. However, Andrew Forrest, FMG's flamboyant CEO, on this occasion failed to achieve terms attractive enough from the Chinese financiers and the much feted deal fell through.

Interestingly, a lack of acceptable financing from the Chinese--or other parties for that matter--has not stopped FMG's planned expansion. FMG announced last week that the Christmas Creek project is commencing immediately. Why is this interesting? Because FMG also announced that the company is able to self-fund the significant project. One can therefore assume that, once operational, this project will add to FMG's ability to self-fund further projects, and so on. The company certainly has more than enough ground pegged to continue this cycle for many years.

While BHP Billiton and Rio Tinto have enjoyed a long time in the Western Australian sun, if the party isn't exactly finished yet, it appears to be drawing to a close.

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