Port Hedland Australia's iron ore boom town - Aussiehome

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Hot spot | port hedland by 2015 – nearly a 200% increase and more than four times that exported in 2005. $37bn in infrastructure projects Over the last five years, billions of new infrastructure projects have been built in the East Pilbara, which in turn has fuelled the massive influx of highly paid miners into the region and subsequent property boom in Port Hedland. Billions more, however, will be spent over the next five years as relentless demand for iron ore comes from China. There are some $37bn in planned Chart 7: Port Hedland iron ore exports 500 450 400 350 300 250 200 150 100 50 0 25 to 30% year-on-year growth 100 MT 2005 200 MT 2010 + 5yrs 300 MT 2012 + 2yrs 400 MT 2013 1yr Thereafter outer harbour Source: Town of Port Hedland Authority and committed infrastructure projects in the East Pilbara and Port Hedland (port facility expansions) region. This is a phenomenal amount of projects, which are anticipated to employ over 29,000 construction and 10,000 operational workers – workers on $100,000-plus salaries that are willing to pay (or are subsidised by their company) the huge and growing rents that exist in Port Hedland. The projects include the $7.2bn Roy Hill project by Prospecting Hancock (owned by Australia’s richest woman, Gina Rinehart) to develop a super, open 160 mtpa now 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2007 2003 2005 2007 2009 2011 2013 2015 cut iron ore mine, brand new railway, power plant and new port facilities in Port Hedland. BHP Billiton is also considering spending more than $10.3bn over its Rapid Growth Projects 4, 5 and 6 to substantially lift its annual exporting capacity. The iron ore miners believe the China growth story and have backed their views with billions of dollars in infrastructure projects. Considerations for investors Investing in Port Hedland is quite different from the usual espoused ‘within 10km from the CBD’ strategy and investors should bear in mind three considerations: • Port Hedland is firmly leveraged to the ‘China story’ and the commodities boom • Any ‘mining tax’ has the potential to curtail the extent of future infrastructure spending • The high price point of properties 1. Strength of the China story The extraordinary gains property investors have enjoyed in Port Hedland have been directly driven by the soaring demand for iron ore from China. In the face of the financial crisis, China has sailed through smoothly aided by its Table 2: Port Hedland & East Pilbara infrastructure projects Project Proponent Location Commodity Status Cap exp. Solomon Hub Expansion Source: Omega Investments Fortescue Metals Group Peak workforce Operational workforce East Pilbara Iron ore Pre-feasibility $9.3bn 15,000 6,000 Roy Hill Hancock 277km south of Port Iron ore Feasibility $7.2bn 1,500 750 Hedland Rapid Growth Project 5 BHP Billiton East Pilbara Iron ore Commenced $6.1bn 3,500 Chichester Hub Expansion Fortescue Metals Group East Pilbara Iron ore Pre-feasibility $5.25bn 7,500 2,700 Ridley Magnetite Atlas Iton 75km east of Port Iron ore Feasibility $3bn 960 740 Hedland Rapid Growth Project 6 BHP Billiton East Pilbara Iron ore Commenced $2.14bn 1,000 Rapid Growth Project 4 BHP Billiton East Pilbara Iron ore Commenced $2.1bn 1,000 Solomon Port Facilities Fortescue Metals East Pilbara Iron ore Pre-feasibility $1.2bn 400 Group East Pilbara FerrAus 70km from Newman Iron ore Feasibility $600m Panorama CBH Resources 160km south-east of Iron ore Pre-feasibility $242m 176 160 Port Hedland Utah Port Berth Port Hedland Port Hedland Iron ore Commenced $225m Port Authority Total $37.36bn 29,036 10,350 www.yipmag.com.au 27
Hot spot | port hedland Case study Katie Joy Former St John Ambulance paramedic Katie Joy is one of the great success stories to come out of Port Hedland – within three years, Katie went from a 96-hours-a-week job to early retirement in her early 30s through riding the Port Hedland boom. After extensive research convinced her that the billions of dollars of projects from one of the largest companies in the world spelt great things ahead for Port Hedland, she used equity from an existing property in Perth to purchase two investment properties for $358,000 and $360,000 within a fortnight of each other in February 2006. She chose these properties based on their ‘executive style’ presentation, which appealed to company tenants, and the fact they were low maintenance in nature. Just over a year later, she plucked up the courage to purchase a $760,000 double-storey house in Port Hedland (June 2007) and then a $560,000 South Hedland three-bedroom home in October 2007. As her equity continued to rise on the back of the commodities boom, she purchased once again in January 2008, buying a $730,000 South Hedland home. While living in Port Hedland, Katie self-managed her properties but once she moved back to Perth they were managed by local real estate agents, including Crawford Realty. Now retired since 2008, with a $4.3m portfolio, $1.5m of equity and $8,500 per week rent, Katie continues to hold her investments. 28 $635bn stimulus package. With a double dip recession being speculated by some economists for the US, there are concerns that this would translate into lower demand for Chinese manufactured goods that in turn would slow China’s relentless growth (and iron imports from Port Hedland). This said, the world’s leading economists continue to see very strong GDP growth for China in 2011, which will only be slightly lower than its 10-year average of 10.1%: • 9.9% according to the IMF • 9.7% according to the OECD • 9.1% according to the Asian Development Bank • 8.5% according to the World Bank Note, their forecasts are nearly three times the 3.5% IMF forecast for Australia’s 2011 GDP. Consequently, a serious slow-down in China (and therefore iron ore exports from Australia) does not appear likely. 2. Mining tax threat The Mineral Resource Rent Tax (MRRT) negotiated by BHP Billiton and Rio Tinto with the Gillard Labor Government immediately before the August 2010 election was a ‘watered down’ version of the aggressive Resource Super Profits Tax, which was attacked by mining companies, the Western Australian government and the federal opposition as devastating for the mining industry. The future of the MRRT is uncertain. Labor lost numerous seats in Western Australia and Queensland due to the proposed tax but The Australian Greens party (who now hold significant power in parliament) are in favour of increased taxation on mining companies. However, the potential for such a tax did not stop Rio Tinto from announcing immediately before the election an $862m expansion of one of its Pilbara ports. Indeed, Rio Tinto said this expansion would be the start of a multi-billion dollar enlargement of its Pilbara operations (estimated by Merrill Lynch to cost up to $11bn). As they say, actions speak louder than words and BHP Billiton was also party to the same agreement as Rio Tinto. While FMG continues to protest any future tax, the fact that the MRRT headline rate has been reduced from 40% to 30% and it allows BHP Billiton to depreciate its current operations at market value (rather than historic book value) before payment of any tax means that the real sting from any tax has already been taken out. 3. High price point A median house value of $955,000 will make any investor draw their breath. However, so is a 10% yielding, cash flow positive property with strong capital growth potential. Further, investors have the option of buying in South Hedland (median house value of approximately $630,000) on the same yield and growth prospects. Ultimately investors need to weigh up the higher price point, with immediate cash in their pocket and the future capital growth prospects. Opportunity to ride the boom As the second leg of the commodities boom begins in earnest, property investors have a unique opportunity to capture substantial capital gains and 10%-plus yields in Port Hedland’s property market. Should house values continue to rise by even half the 10-year average of 18%, this will mean capital gains of some $90,000 per annum. Rich rewards indeed. Investors should also consider where else in Australia has over $500m in civic and local infrastructure projects planned and underway to specifically improve the ‘liveability’ of the town’s population. Or which other town actually has credible population growth plans to double in size within the next 15 years but also immense land supply constraints. Many investors missed yesterday’s commodities boom; others, however, will not miss today’s. Flynn De Freitas is principal of Omega Investments, a boutique firm specialising in residential property investment in regional mining towns. Utilising his training and experience as a former management consultant and investment banker, he has developed an extensive knowledge and understanding of towns exposed to the commodities boom. For investment opportunities please visit www.omegainvestments.com.au www.yipmag.com.au
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