On Wednesday the Financial Review reported that Australia was one of six sovereign nations whose intelligence services had routinely breached Rio's communications network through a period that saw it, consecutively, a target for BHP, a target for post-GFC collapse, a target of Chinese ambition and a target for partnership with BHP.

"Everyone knew," a Rio source said on Thursday. "No one was conformable but no one could do anything about it except be very careful how they communicated, which was extremely difficult."

There were deep fears through 2010 at BHP that this constant surveillance had morphed into something more sinister and invasive when, over a period of weeks, the Melbourne home of a senior executive and at least four other staff members were broken into.

There were reasons to be suspicious other than simply the close timing of the break-ins. The homes were owned by BHP people with working knowledge of the proposed iron ore merger with Rio and the thieves consistently targeted laptops and filing cabinets rather than taking items of more material value including cash.

It was the same story at Rio, according to an insider involved in the takeover defence and the ultimately failed merger discussions. Louie Douvis

Outside of this slightly threatening period, the inhabitants of BHP and Rio accepted the collective interest of the international intelligence services as a predictable product of their efforts to disturb the tectonics of the global resources sector.

Extracting and selling very big volumes of minerals and energy will ever be a matter of national and international importance. And the messing of the mining industry with regional and global geopolitics was never more real that through the peak China boom years that stretched from 2007 through to 2011.

In moving to acquire Rio, BHP angered and frightened its politically powerful customers in Europe, North Asia and China.


The takeover bid and the later iron ore merger effort were resisted with bitter virulence by the German and Japanese steel industries. And China Inc, in particular, was left angry and frustrated by a June 2009 iron ore merger proposal that arrived in concert with a $US15 billion call on shareholders and with the formal cancellation of a plan that would have seen Chinalco spend $US19.5 billion embedding itself into the fabric of the Rio business.

There were reasons to be suspicious other than simply the close timing of the break-ins.

Along with myriad national governments, the deal served to unpick the "pioneering strategic partnership" that would see Chinalco move from senior shareholder to joint venture partner in a rich host of Rio's operating entities.

The plan was that Chinalco would pay $US12.3 billion for different levels of direct ownership in nine of Rio's core operating assets. To pick just three of the many, Chinalco planned to own 15 per cent of the Hamerlsey iron ore business, 49.75 per cent of Rio's 30 per cent share in Escondida and 30 per cent of the Weipa. This was a Eureka moment for Chinalco and the Chinese state. And it loomed a huge risk for the Australian iron ore sector generally and for BHP particularly.

So BHP, then led by Marius Kloppers, set out to undo what it could not sit back and allow to stand. To make that happen, BHP needed to introduce an alternative transaction that would lure Rio to other funding options.

Now while Kloppers & Co worked through their options, Rio found itself losing two chairmen in less than a month or so and its board had turned to new man Jan du Plessis. And, when it came to options other than Chinalco, the South African was all ears.

So BHP, then led by Marius Kloppers, set out to undo what it could not sit back and allow to stand. Rob Homer

In June, after just five months of "pioneering strategic alliance", Rio walked away from the Chinalco option, preferring instead to issue $US15 billion in new equity and a possible iron ore merger that would see BHP pay $US5.8 billion for the value square needed to make the thing a 50-50 joint venture.


That the merger never happened because the competition overlords of the European Commission, Japan, South Korea, Germany and Australia (in what remains an incomprehensible back flip given the ACCC approved the 2007 takeover proposal).

But, outside of the disappointment of failing in a third and last attempt to align the two giants of Pilbara iron ore, the merger effort achieved everything else that Kloppers, du Plessis and Australia needed it to.

Retired hurt

Fortescue has very sensibly given up the ghost on offering guidance on price realisation after a year that saw market reality consistently fall shy of management's expectations.

Now while Kloppers & Co worked through their options, Rio found itself losing two chairmen in less than a month or so and its board had turned to new man Jan du Plessis. Daniel Munoz

Fortescue sells its product at a discount to the market-making 62 per cent iron ore index and that didn't matter a whole lot until last year when the Third Force stopped being able to attract something better than 90 per cent of the index.

Fortescue then spent six months and more tying to believe that the quality delta was a cyclical blip and that long run pricing norms would return. As a result it entered 2017-18 projecting that annual realisation would run at between 75 per cent and 80 per cent.

It was forced to adjust that guidance twice, latterly trimming expectations of the annual average realisation to 65 per cent. But that too has proved to be just that little bit optimistic. While contract price realisation hit the 65 per cent target, the year end number averaged 64 per cent of the index average of $US69 a tonne.


It is just slightly concerning that through the final quarter realisation dipped to 63 per cent of a lower iron ore price. The Platts 62 per cent index averaged $US65 a tonne through the quarter.

If our maths is right, that means Fortescue's average price through the year was $US44.85 a tonne but that it sold iron ore at $US40.95 a tonne through the June quarter.

Once again, that seems to run counter to Fortescue's marketing expectations. Its preferred paradigm is that realisation will rise when the index price falls.

Now, it must be said, we have opened on the only obvious negative of what proved to be a stellar three months of activity for Fortescue. It continues to sustain its claim as the Pilbara's lowest cost operator and it did that by pushing its system to a rare pitch of productivity.

Through the quarter Team Fortescue processed ore at an annualised rate of 176 million tonnes and exported it at a rate of 186mt. Those additional volumes and the emerging cost efficiencies being extracted from automation and the deployment of new conveyor technologies saw Fortescue prune quarterly costs by 7 per cent to $US12.17 a wet metric tonne. It is important to note that this is not the same base as the dry metric tonne measure for pricing, so making a direct correlation between price and cost is just that little bit more complicated.

Fortescue has very sensibly given up the ghost on offering guidance on price realisation after a year that saw market reality consistently fall shy of management's expectations. Erin Jonasson

What we can say though is that the cost trend is encouraging and made even more impressive by the fact that there has been a potentially structural shift in Fortescue's cost base given that it is now going to be moving more tonnes of overburden and waste to get at its ore.

Though the fourth quarter Fortescue moved 74mt of waste to get at 49.8mt tonnes of ore that was then processed into 44.1mt of exportable product. Through the same period last financial year Fortescue moved 53mt of waste to get at 53mt of ore that was processed into a record 45.9mt of exportable product.

So Fortescue is moving more now to get less. And yet it was able to make that happen at a lowest cost of production than the March quarter and at a cost of only US1¢ a tonne more than the previous June quarter.

This result, along with the fact that the business is sitting on $863 million of cash, that it will generate a profit of better than $US1 billion this year, that it has further trimmed debt and it will fund its $US1.28 billion ($1.72 billion) Eliwana project from cash flows, says only that Fortescue is absolutely nothing like the next Atlas Iron.