Iron ore has turned into a golden investment for anyone who can dig it up and get it on a ship, preferably bound for China, with the spot market price of ore nearly twice what it was a year ago. Contract iron ore prices under negotiation with steel mills are forecast to rise 40 percent or more this year as steelmakers crank up mills. BHP sells about half its iron ore to China, where steel output is running at record rates.
"This is BHP investing in one of its best businesses," said Macquarie Bank mining analyst Brendan Harris. "It's an investment in their own backyard where they know the assets, they know the risks and they understand the commodity." Harris expects iron ore to account for about 24 percent of BHP's underlying earnings before interest and tax.
At that level, only BHP's base metals and petroleum divisions will earn more, he added. "This investment is the continuation of our long-term strategy of adding capacity in our high-quality iron ore business to support our confidence in the longer-term demand for iron ore globally," Ian Ashby, president of BHP's iron ore division said in a statement on Friday.