Rich Pickings: How Gina Rinehart’s fortune COULD have dropped by $9 billion

While politicians back-and-forth over whether or not the mining boom is over, Australia’s big miners have a more pressing problem – deciding whether falling commodity prices have made any of their planned projects unsustainable.

The fall in the iron ore spot price from a peak of $U180 a tonne last year to under $US90 a tonne will be causing executives at BHP Billiton and Rio Tinto plenty of headaches.

But it will also be vexing the mind of Gina Rinehart, who is currently trying to drive her flagship Roy Hill iron ore project – the project that will turn her into a miner in her own right – towards what now looks like an unlikely deadline of starting shipments in 2014.

A report in The Australian Financial Review last week claimed the economics of the $13 billion project relied on an iron ore price of at least $US100 a tonne. But this week, Morgan Stanley tipped spot prices to fall as low as $US83 a tonne, sending further shudders through the industry.

The price is being driven down by concerns about global economic growth, growth in China and supply increases. Falling iron ore prices won’t make Rinehart’s job of developing Roy Hill any easier. While Rinehart has signed sale agreements with two Chinese steel groups, she is still fighting to secure funding of up to $7 billion for the project.

While banks will look more at the long-term prospects of a project than spot price movements, sentiment can be a killer in deals like this. And sentiment is not exactly running with the mining sector right now – just ask Nathan Tinkler, Rio Tinto and Fortescue Metals Group.

Since May 24 – the day BRW named Rinehart the richest woman in the world with a fortune of $29 billion – the Rio and Fortescue have seen their stock fall by 12.5% and 19.9%.

But how might the drop in iron ore prices impact the value of Rinehart’s empire?

To assess this, I’ve gone back and looked at the valuation method BRW used in its $29 billion valuation in May – which was based on an iron ore price of $144.73 – and done some back-of-the-envelope valuations using an iron ore price of $US90 a tonne and $US83 a tonne.

Clearly, these are only very rough estimates. But they do suggest that more than $9 billion could have been shaved from Rinehart’s valuation.

Hamersley royalty

Rinehart receives 1.25% of the revenue generated by Rio Tinto’s Hamersley Iron business. The Rio Tinto results show revenue for the six months to June 30 was $US9.12 billion – call it an annualised $18 billion. Rinehart’s annual royalty payment would be $225 million. Apply a multiple to this revenue stream – let’s use the 10.2 price-to-earnings ratio used by BRW back in May – and you can mount an argument this royalty is worth as much as $2.25 billion. No real change here.