Fortescue Chief Executive Officer (CEO) Nev Power holds a piece of iron ore
Fortescue Chief Executive Officer (CEO) Nev Power holds a piece of iron ore in front of a remote-controlled truck at the Fortescue Solomon iron ore mine located in the Sheila Valley, around 400 km (249 miles) south of Port Hedland in the Pilbara region of Western Australia, December 2, 2013. Reuters/David Gray

Australia’s leading iron producer Fortescue Metals Group has shown the way amidst falling iron ore prices, by inking a unique deal with its partner BC Iron that offers a flexible rail tariff that is linked with changing iron ore prices.

The deal, surely a relief for BC Iron, will see BC’s use of Fortescue's rail and ports billed on the basis of changing market prices of iron ore at Pilbara. The new arrangement will take effect from Nov. 1 and will be valid for a period of three months initially.

The two companies are partners in the Nullagine joint venture (NJV) company, where the rail and port services of Fortescue are offered by Pilbara Infrastructure (TPI), which is a subsidiary of Fortescue, reports Mining Technology. The NJV uses Fortescue's rail infrastructure at Christmas Creek to transport the iron ore to Port Hedland.

Accordingly, the companies will absorb the price changes in iron ore by setting a benchmark iron ore price between US$40 (AU$56.18) and US$70 (AU$98.3) per tonne for pricing the tariffs.

The objective is to keep rail prices down as long as the benchmark iron ore price is lower than US$56 (AU$78.6) per tonne in a month. Rail tariffs will go up in those months when the average iron ore price is above $78.6 per tonne.

More options

According to a report by The Sydney Morning Herald, the rail tariff deal offered by Fortescue is strategically significant as it comes at a time when BC Iron could have explored more options, such as the rail facility at Gina Rinehart's Roy Hill project.

Under the present conditions, the deal will help BC Iron a lot and may save US$2.3 million (AU$3.23 million) from its transport bill. BC Iron’s Managing Director, Morgan Ball, said the flexi pricing in the deal would help the company in lowering the break-even costs.

“This is a positive outcome for BC Iron and reflects a co-operative approach between Fortescue and BC Iron given the current market environment,” the MD said.

Fortescue CEO Nev Power said the arrangement whould “serve both parties well” and is an example of his company's willingness to allow other companies to use its rail and port infrastructure.

The Nullagine joint venture between the Fotrescue and BC Iron came up in 2009. BC Iron initially offered 50 percent stake to Fortescue to gain rail access. However, in 2012, BC Iron increased its stake to 75 percent after purchasing 25 percent stake at $190 million from the partner.

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