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May 24, 2012

Two months, $10b: Gina Rinehart's big leap

We got our prediction for the top end of the BRW Rich List wrong. It wasn't Gina Rinehart on top with daylight second -- it was daylight, twilight, moonlight and everything in between.

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Well, I got my prediction for the top end of the BRW Rich 200 wrong. I tipped it would be Gina Rinehart on top with daylight second. In the end it was Rinehart first with daylight, twilight, moonlight and everything in between running second.

According to BRW, Rinehart’s wealth has soared by an incredible $18.7 billion in the space of one year to a staggering $29.17 billion. At that level, the magazine says, the queen of iron ore becomes the richest woman in the world, streaking ahead of Wal-Mart heir Christy Walton, who was valued by Forbes in March at $US25.3 billion.

Of course, that sort of ignores the fact that Forbes valued Rinehart at $US18 billion on the same global billionaire’s list and leads to a very good question: how did Rinehart’s wealth climb by more than $11 billion in the space of two months?

As a former editor of the BRW Rich 200 list and someone who has worked with Forbes on their valuations, I can say that Forbes does take a very conservative approach when it comes to assessing private assets and particularly undeveloped assets. BRW’s valuation of Rinehart appears to be somewhat aggressive, although to its credit the magazine has done a good job of laying out its reasoning.

BRW points to a clearer valuation of Rinehart’s Roy Hill 1 project, which was valued at $12.8 billion when South Korean and Japanese steel groups took a 30% stake. That would leave Gina with a stake of $8.96 billion.

It then values her stake in the Hope Downs 1 mine, which is operated by Rio Tinto. Based on an iron ore price of $US144.73 and using a multiple of 10.2, it ascribes a value of $9.7 billion to Rinehart’s stake in this operation. It values the Hope Downs IV mine, set to come into production in 2013, using the same assumptions, and gets a value of $3.1 billion.

That takes the valuation to $21.76 billion. The rest comes from adding up Rinehart’s royalty stream from Hamersley Iron, her stake in the Nicholas Downs manganese project and two undeveloped coal projects in Queensland, which have a notional joint venture value of $8 billion. There’s also a little bit of money for Rinehart’s Fairfax and Ten Network stakes.

The BRW valuation is completely reasonable and putting a price on undeveloped assets always requires educated estimates. But to me it does feel a bit “glass half full”.

The iron ore price used of $US144 a tonne does jar somewhat with the latest statements from BHP Billiton chief Marius Kloppers that received iron ore prices had fallen from a peak of $US180 last year to around $US135. Last week’s West Australian state budget assumes iron ore prices will fall to $US115.20 a tonne in 2012-13 and $US102.90 a tonne in the following year.

Just as there doesn’t appear to have been much discount built in for this cloudy outlook, there doesn’t seem to have been any discount applied for the fact that Rinehart has just handed her children the right to grab a 25% stake in her company, Hancock Prospecting.

While there is some doubt as to when and if the kids will take control of their shares — Rinehart has warned they will face huge tax bills if they do and they are unable to sell them to anyone outside the Rinehart family — you could argue that a more conservative valuation would need to take this into account.

But if BRW’s $29 billion valuation is right, then Rinehart’s four children notionally control a stake in the business worth more than $7 billion. They won’t give up their legal battle easily and they could work towards a deal where they settle or sell out to Gina herself.

Of course, while you can make an argument that the $29 billion valuation for Rinehart is too high, it’s also possible to argue it’s too low.

If China’s growth continues; if the resources boom continues for another 20 years; if iron ore prices remain strong; if it should happen that Rinehart’s projects can be developed successfully; if Gina can sort out her battle with her kids … it’s possible to make a case for a valuation of $100 billion or more. There are lot of assumptions to be made, but with a bit of creativity it is possible.

And in the end, there are no wrong answers here. Private assets and particularly undeveloped mining assets are very difficult to value. BRW has been more aggressive in its assumptions than in previous years, but Rinehart’s is a fortune that has undergone incredible change in a very short space of time.

Whether it’s $20 billion or $29 billion matters little. This is a fortune that now towers far above anything we’ve seen in Australia and will for decades to come.

*This article was originally published at SmartCompany

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25 thoughts on “Two months, $10b: Gina Rinehart’s big leap

  1. Aaron F

    It really would be embarrassing to be that wealthy yet that determined not to pay more (well have the company that you own pay more) tax. Tax is money that goes towards the community. Helps the less fortunate (ie the opposite end of the scale of those that are born into hundreds of millions). Helps build more roads, build more hospitals, puts more money into education. YOU WILL STILL BE OSCENELY WEALTHY AFTER THE TAX! Perhaps they should consider spending time with the Smith Family or Salvation Army and see families who have to make daily decisions on whether to heat the house for their sick child or put food on the table that day.

    Of course the mining tax is always demonised by saying it will cost jobs. Exactly what jobs are they talking about. Are they saying they currently employ people for no reason just because they like giving away money and if the tax comes in they will no longer be able to afford employing people out of the goodness of their hearts? Are they saying digging stuff out of the ground just won’t be worth it anymore? Apparently Norway taxes its mining companies 80%, and there are still plenty of companies prepared to digg the stuff up for the 20%. 20% of billions is still a lot of money. And because of this Norway can afford a lot more things for the community.

    In fact it should be a broad super profits tax, including banks. Yes Australia needs strong banks to weather financial turmoil. Yes money (for the banks to then lend) used to cost less than what it does now. But they don’t need to make a record profit every 6 months. I would feel confident in the banks if record profits came around every three or four years. And when they talk about interest rates and the cost of money, they need to include profit margins as well. Cost of money does not directly equal interest rates. Cost of money and profit aimed for = interest rates. If cost of money goes up, but the banks accepted very good profits (down slightly from record profits), interest rates could be much lower than what they currently are.

  2. Aaron F

    Brady, yes I too can not work out why middle Australia wants to vote for paying more tax so wealthy mining companies can pay less. It is like Americans surviving on food stamps or with medical problems they get cured because they can’t afford health insurance voting for the anti-food stamps ant-universal health care Republicans.

    A few VERY VERY profitable mining companies pay the MRRT = EVERY small businesses in Australia paying 1% less tax. 1% might not sound like very much but it will be the difference between surviving and not for some (ie between surviving and everyone in that business losing their jobs). It will also be the difference between creating an additional job or not for many small businesses. Or between setting up a second store (with the jobs created in doing so) or not. Small businesses in Australia won’t be flying in overseas workers. And after all this, the mining companies will STILL be very profitable.

    So to all those people out there working for a small business who vote coalition because they believe the rubbish that the MRRT will ‘cost jobs’: If the business closes and you lose your job, you have yourself (at least in part) to blame.

    To all the people out there looking for work with local businesses who vote coalition: If you find there aren’t many places hiring, you have yourself (at least in part) to blame.

    To all the people out there who work in the mining industry: When you lose your job because Gina and Co hire workers from overseas (even if/when the coalition cancel the MRRT) and you realise they never really did care about your job, that was just propaganda to protect their super profits, you’ll know you are a sucker.

  3. Brady

    “About time we held a Bastille day like the French & put an end to this Rinehartism!!

    Could not agree more. Although when overseas’s I have sometimes found that the French can…. well…. be a little arrogant, I simply love the way they generally, don’t put up with bull…t. Take for example the time when there was some sort of diesel cost dispute (cannot remember the exact details) and the government basically said ‘this is the new price, get used to it’. In response, the very next day you had 10,000 trucks blocking roads around the country and a government suddenly willing to negotiate.

    In our country we just role over and die on mass. Without trying to justify this, I believe this is quite a recent trend. Because of the either the Union’s corruption/media bias/ government lies, the union’s are now held in very low esteem these days, and we have a whole younger generation coming through the workforce (I’m a primary school teacher, who finished a mature age degree 2 years ago) who have absolutely no idea that the wages and conditions that exist today were fought for every step of the way by the unions, and that constant fighting and defending is necessary for middle Australia’s continued goal of financial equality. Even Labor, but ESPECIALLY Liberal, will always take, take, take from the little person if allowed to do so. The corporate side of town (which IMHO, includes both the previously mentioned parties) will only stop pushing their agenda’s when we are all slaves working 18 hour days. That is one side. On our side, it is up to us to push back the other way.

    What we really need to teach our young people, is too examine carefully everything that people say, always look for hidden agenda’s, and that the current condition’s in our country are not a God given right, but a living thing, that must be cared for and nurtured, lest, as is happening now, it dies.

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