BHP and Iluka amend Area C royalty agreements

BHP and Iluka have amended their Mining Area C iron ore royalty agreements, which have been in place since 1994.

“Since the royalty agreement was entered to in 1994 the basis upon which iron ore is marketed and sold has changed significantly,” Iluka explained in a company statement.

“For example the volume sold primarily on a blended basis and incorporating freight and insurance adjustments; to reflect this change, an agreement has been reached for a revised basis for the determination of royalty.”

The new agreement will see the decrease of the royalty rate from 1.25 per cent to 1.232 per cent, backdated from 1 July, last year.

As part of this revision, Iluka will receive a one off payment of US$8 million. However it will continue to hold an ‘in-perpetuity royalty’ over the region.

The agreement to wind back Iluka’s royalties, albeit only fractionally, come as the iron ore sector continues to face increasing pressure.

The metal has been trading around the US$50 per tonne mark, frequently dipping below this psychological benchmark, as production increases in the face of dwindling demand and BHP faces likelihood of a credit downgrade.

According to recent notes by the Macquarie Bank, the iron ore sector will need to begin shelving production and remove supply if the industry seeks to reinvigorate demand.

"Demand growth is now extremely stagnant. As a result, demand is only growing into installed capacity very, very slowly. The only thing that will now close the balance is supply cuts," the bank said in a research note.

While longer term actions such as the decrease of royalties, coupled with a one-off payment, reduce the miner’s costs, unless drastic action is taken BHP risks a downgrade as within the next six to 12 months, with the lower performing assets already spun-off into a weakening South32 and all eyes on the performance of its core assets in a ebbing market at the fore.

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