Last week, Forbes announced its list of the world’s richest people, anointing US-born media heiress Blair Parry-Okeden as Australia’s richest person. As such, Gina Rinehart has fallen to No. 2, with an estimated net worth of $12.1 billion. Rinehart has been the richest person in Australia since 2011, according to BRW, reaching her apotheosis in 2012 with an estimated net worth of $29 billion. At the time, she was believed to be the richest woman in the world and on the way to becoming the world’s richest person. But it appears Forbes hasn’t been paying all that much attention to the iron ore price, which has slumped from US$180 per tonne to only US$40 per tonne. Given the massive drop in the price of the only real product Rinehart sells, how rich is she really?

Rinehart’s wealth has slipped alongside the iron ore (and coal) prices. In 2013, BRW (which analyses the richest Australians) pencilled Rinehart’s net worth at $22 billion, in 2014 it was down to $20 billion, and for 2015, $14 billion. Despite the slump in iron ore prices, Forbes surprisingly only marginally lowered their valuation on Rinehart.

Assessing the wealth of the very wealthy is extremely difficult at the best of times. When wealth is tied up in private businesses it’s even harder (plus assessing the value of current holdings doesn’t account for dividends paid along the way, nor asset sales that are held in cash or luxury assets). Nevertheless, one can make a relatively educated guess.

Mining wealth is highly leveraged to commodity prices. For example, let’s say the cost of producing and selling a tonne of iron ore from the ground is US$50. If the iron ore price is US$75, that’s a profit margin of 50%. However, if the iron ore price increases to US$180 (which it did between 2009 and 2014), the profit margin skyrockets, delivering a margin of 260%. As a result, those who own mining assets during a boom will witness their wealth increase massively. However, if the underlying price isn’t sustainable (which the iron ore price never was), then that change in wealth is really a mirage. Just ask Nathan Tinkler.

Even worse, the wealth mirage can lead to a misallocation of resources and eventually wealth destruction if investment decisions are made based on false pricing. So not even is the person not as rich as everyone thought, he or she might not actually have any money at all.

In journalist Adele Ferguson’s fantastic biography of Rinehart, she listed her major sources of wealth being: 1) the Hamersley royalty paid by Rio Tinto (which was secured by Lang Hancock); 2) royalties from Hancock Prospecting’s 50% stake in the Hope Downs mine, which is run by Rio; 3) the Roy Hill mine; 4) various coal assets; and 5) other stuff Rinehart owns.

Rinehart was first acknowledged as a billionaire in 2006 when BRW pinned her wealth at $1.8 billion (the previous year she was in at $900 million). Back in 2006, when her wealth started to rise, the iron ore price was around US$30 a tonne. But for the two decades prior, the iron ore price was stubbornly stuck at around US$13. It then took off like a rocket ship (and recently collapsed).

wealth

Source: www.quandl.com

Rinehart’s original Hammersley royalty (which she inherited from Lang) was worth as much as $250 million annually back in 2012. However, that was when the iron ore price was sky high. In 2005, when the iron ore price was a little lower than it is now, Rinehart’s royalty was believed to be worth around $20 million a year. So it’s likely the annual royalty is somewhere between those amounts and probably has a capitalised value of around $300 million to $400 million, give or take.

Rinehart’s most valuable asset is still Hancock Prospecting’s 50% stake in Rio’s Hope Downs iron ore mine. Rinehart had initially sought to develop Hope Downs in-house, but later sold half to Rio, which now operates the mine. Hope Downs and Roy Hill are the major assets of Hancock Prospecting. Hancock’s 2015 financial year results (which were released to ASIC in November) indicate that it generated revenue of around $2 billion and made a profit of around $600 million. However, during 2015, the price Rio was receiving for iron ore averaged around US$70 an tonne, almost double the current price (and remember the effect of higher commodity prices on mining company profits). Hope Downs has a low cost price (around US$20 per tonne) so it still makes of money with iron ore prices at US$40, but it’s likely that the value of Rinehart’s stake in Hope Downs isn’t worth much more than $1 billion at current iron ore prices (although a lot more info is needed to get a complete valuation of the asset).

The other major driver of Rinehart’s wealth in recent years is the recently operational Roy Hill mine. Unlike almost all of her other assets, Rinehart discovered and developed Roy Hill without the help of Lang (although cynics may note that Roy Hill wouldn’t have been funded without the Hope Downs royalty stream). In any event, Rinehart often points to Roy Hill as her finest achievement (Hancock Prospecting still owns 70% after selling a minority stake to POSCO, Marubeni and China Steel).

There’s only one small problem: Roy Hill has an estimated cash cost of US$50 per tonne.

That’s higher than the current iron ore price. So that means Rinehart’s Roy Hill is actually losing money for every tonne of iron it currently ships. Of course, it’s possible that the iron ore price will recover some of its losses, and, as a result, there is some option value. But based on current prices, Roy Hill is probably worth virtually nothing. (It’s tempting, when valuing an asset, to refer to past prices, however, it’s also a very stupid way to make an investment decision).

While Hancock Prospecting generated operating cash flow in 2015 (and paid a whopping $300 million dividend), its balance sheet doesn’t look overly attractive. It has more debt than cash, and almost all its net assets relate to plant and equipment for mines that are making little money at current iron ore prices.

Then there’s Rinehart’s coal assets, largely based in Queensland’s Galilee Basin. In 2014, Hancock Prospecting wrote off $650 million owed by its partner, the India-based GVK. Coupled with the crashing coal price and rise of renewable energy sources, it’s likely that the coal assets are also currently worthless.

As for the other stuff, it’s likely Rinehart has at least hundreds of millions of dollars of assets that have been purchased over the years and has received hefty dividends from Hancock, but all in all, it’s certainly possible that the Rinehart fortune is around a billion or two, and if the iron ore price continues to fall, it could get a lot lower than that.

Peter Fray

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