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Western Australia’s environmental authority has approved Rio Tinto’s plan to build a massive new iron ore mine in the Pilbara.

The Koodaideri mine would be located 110 km north-west of Newman and is expected to have a 30 year life span.

According to documents filed by Rio subsidiary Mount Bruce Mining, the mine is expected to produce 35 million tonnes of ore a year, before a ramp up by 2030 which will see that figure increase to 70 million tonnes a year.

The mine would require a new 167 km railway to be built in order to connect the mine to Rio’s Dampier-Tom Price line.

New roads, power sources, water infrastructure and FIFO village facilities would also be need to be constructed.

Up to 2,000 people would be needed to build the mine while 700 workers would be required for the mine’s operation.

The estimated price tag for the mine and rail development is $US3.2 billion ($3.5 billion).

The Environment Protection Authority said the mine could go ahead subject to 14 conditions including measures to protect local bat and quoll colonies.

It also wants to ensure that the mine does not increase the spread of asbestos in the environment.

The proposal is open to a two-week public appeals period before being sent to WA’s Minister for Environment Albert Jacob for final approval.

The EPA’s approval comes one the same day as the price for iron ore hit its lowest point in five years.

Dropping 4 per cent overnight, the commodity is trading at $US72.10 a tonne.

However, with a production cost of just over $US20 a tonne, Rio is shielded from price drops, and plans to expand its exports out of the Pilbara from the current 270 million tonnes a year to 360 million tonnes a year.

A final investment decision for Koodaideri is not expected until at least 2016, as the company focuses on upping production through less expensive brownfield expansions.

Shenhua’s huge Watermark Coal project has been recommended for approval by the NSW Department of Planning and Environment.

The open-cut coal project, located 25 km south-east of Gunnedah, will produce 10 million tonnes of coal per annum if approved, and employ more than 600 people.

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BHP will be looking at the prospect of trialling automated haul trucks at the Mount Arthur coal mine, a decision that will be finalised in the next 12 months.

If implemented, this would be the first trial of autonomous mining haul trucks in NSW, which was flagged by BHP coal boss Dean Dalla Vale early this year.

BHP has already been testing driverless haul trucks at their Jimblebar iron ore mine in Western Australia for more than 12 months, and will soon ramp up the fleet from nine to 12 trucks.

A BHP spokesperson told Australian Mining Mt Arthur is on the cusp of beginning an identification study into the requirements of such a trial, such as examining potential suppliers, equipment, and equipment modifications to suit the mine.

The identification study will be completed by the end of FY15, after which BHP Mt Arthur will determine whether to proceed with the trial.

“If a decision is made to go forward with a field trial, the autonomous truck project would be conducted by a dedicated project team in an area of the mine pit separate from main operations,” the spokesperson said.

“No decision has been made, but we will continue to keep our employees updated.”

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The Planning and Assessment Commission recently approved an extension of the Mt Arthur coal mine operations until 2026, on the grounds that it would facilitate employment of up to 2600 workers, Newcastle Herald reported.

NSW member of the legislative council for the Greens Jeremy Buckingham said the prospect of a new trial indicated “the absolute hypocrisy of these multinational coal companies”.

“They use the spectre of job losses to demand mining approvals, while at the same time act to implement measures that cut employment,” Buckingham said.

Last week Mt Arthur announced 150 jobs at the mine would be cut, bringing the number of redundancies at the mine to 500 for the past 12 months.

Mt Arthur currently runs four crews of haul truck drivers, with 80 trucks operating each shift.

The world’s biggest iron ore producer, Vale, has announced its intention to expand production despite a falling price. This follows similar announcements by Rio Tinto and BHP.

This expansion in production by the three largest iron ore exporters in the world, accounting for over 60% of the market, is puzzling and it may not be in the best interests of the resource owners in Western Australia and Australian taxpayers generally.

Why would firms pursue such a strategy? Western Australian Premier Colin Barnett has suggested the big miners may be flooding the market to reduce the price and drive higher-cost suppliers from the market.

Indeed, Vale’s CEO has indicated the objective is to displace competitors’ quantities. This is plausible as there are many producers that are marginally profitable at current world prices. They will likely exit the market if prices are reduced further.

Given the big miners’ market share, it stands to reason that higher production volume will have a negative impact on iron ore prices. Perhaps the big miners hope that once higher cost producers exit the market, prices may rise again.

However, there many reasons to suggest such a view is too simplistic and this strategy will not work.

Crucially, iron ore production is by and large a mining and extraction activity. This means underground resources do not disappear if a high-cost miner exits the market. Equally, once resources are mined, extracted and sold at a potentially low price, the resources are gone and its owners will not be able to enjoy future higher prices.

It may make sense for the big miners to ramp up production now, despite causing a reduction in prices, if there are particular reasons to believe the demand for iron ore will decrease in the future. If this were the case, then it might be better to sell now, even if at reduced prices, vis-à-vis selling in the future at even lower prices. But this is unlikely given that many countries in Asia, Africa and South America will still need steel to catch up to the level of development of richer countries.

Is this just supply and demand at work? Is it a case of lower-cost producers vying for larger market shares even if this happens at the expenses of these companies’ shareholders? Unfortunately this ignores the interests of those who own the resources.

Iron ore resources are owned by the state (that is, by the people). The economic rents – the income derived from the ownership of a resource that exists in fixed supply – are captured in two different ways in Australia.

The Western Australian government charges (ad valorem) royalties on the value of iron ore sales. By increasing production, causing prices to fall, the big miners’ action will affect the value of the royalties captured by the government. Even if the big miner’s revenue rises due to quantities rather than prices, royalties may still fall if other Western Australian producers exit the market.

Similarly, Australians at large benefit from the tax revenue collected by the federal government. As the corporate tax is levied on accounting profits, lower iron ore prices may mean lower tax revenue as well.

Again, even if prices increase in the future, Australian governments will not be able to fully capture additional revenue as many high-cost producers are located in other jurisdictions.

Mining companies own capital that can be driven harder, as well as owning the mining rights. Managers may be tempted to increase production and enjoy a higher return on capital even at the expense of not maximising the value of the resource over the life of the mine.

The public, however, captures the value of the resources through ad valorem royalties and the corporate tax system. This means the public would benefit from actions that maximise the value of the resources over the life of the mine.

The challenge for the big miners is how to overcome this temptation of any short-term gains from increasing production to capture market share, at the expense of reducing prices further, resulting in a reduced value for the resources over the life of the mine. The challenge for governments, on behalf of the resource owners, is to continue to challenge the big miners’ thinking as Premier Barnett has done.

The Conversation

Flavio Menezes does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.

Iron ore prices have been forecast to continue their decline, with expectations of a slump to as little as 70 US dollars per tonne, following falls to $77 this week.

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