THE BOURSE WHISPERER: During the week Rio Tinto announced it would be committing US$4.2 billion to develop its tier one iron ore business.
The investment covers US$3.7 billion for expansion of the mining giant’s Pilbara iron ore operations in Western Australia.
Also included in the announced spend-up is US$501 million earmarked for further infrastructure development at the Simandou iron ore project in the West-African nation of Guinea.
“We are directing investment to projects that will generate the most attractive returns for shareholders and are resilient under any probable macroeconomic scenario,” Rio Tinto chief executive Tom Albanese said in the company’s announcement to the Australian Securities Exchange.
“Our superior Pilbara iron ore business has one of the highest margins in the industry, low capital intensity of investment and a strong track record of completing projects on time and budget.”
The investment outlay in the Pilbara will result in the company completing associated port and rail elements in order to expand iron ore production capacity to 353 million tonnes per annum in the first half of 2015.
US$2.9 billion will be spent on adding two berths to the new Cape Lambert jetty and wharf, the replacement of the existing original Cape Lambert rail car dumper, and the Rail Capacity Enhancement project.
US$570 million will be spent on a new gas-fired power station at Cape Lambert, which Rio claims will be more energy-efficient and produce significantly lower carbon emissions than its predecessor.
Rio’s capital expenditure explosion will extend the life of the Yandicoogina mine in the Pilbara to 2021 and expand its nameplate capacity from 52 to 56 million tonnes per annum.
Rio said the expansion was in keeping with its strategy of investing in and operating long-life, low-cost, tier one assets, while maintaining consistency with the company’s economic outlook.
“We continue to see positive prospects for medium- to long-term iron ore demand driven by ongoing growth in Chinese consumption,” Rio Tinto Iron Ore chief executive Sam Walsh said in the announcement.
“We continue to forecast that annual Chinese steel production will grow from its current level of around 700 million tonnes to around one billion tonnes a year out towards 2030.
“This demand growth is coupled with an increasingly challenged supply response, as several high-profile competitor projects have recently been either delayed or postponed.
“Our Pilbara expansion is already well underway, positioning us to capture the opportunities of this market environment. And we have the natural advantages of a readily-expandable Rio Tinto-operated port and proximity to the Chinese market.
Africa has been an investment hub for Rio Tinto of late as it has for the world’s biggest customer for iron ore, China.
The reasons for this are pretty simple. The price of iron ore is coming down and once the nice shiny new African infrastructure is in place it will be a much cheaper place to be a producer.
According to Global Market Research body IBISWorld revenues from iron ore are set to decline.
“After two years of extraordinary growth in 2011 and 2010, the revenue generated by the Global Iron Ore Mining industry is expected to contract by about 4.3 per cent in 2012,” IBISWorld’s said in its Global Iron Ore Mining global market research report in March this year.
“Although output will continue to expand, prices are easing from the high levels recorded in the previous year.
“The gains made in 2011 and 2010 follow a period of gloom during global recession.
“Following the recession, most iron ore supply contracts shifted from annual pricing (which has been the norm since the 1960s) to more flexible quarterly or even monthly pricing.
“The industry’s share of total world GDP in 2012 is expected to be about 0.2 per cent.
“Higher iron ore output and prices over the five years through 2012 are expected to yield average annual growth in industry revenue amounting to 23.9 per cent.”
In other words if you can get out of the expensive areas and into the cheaper ones to allow you to continue digging out extraordinarily large amounts of iron ore at lower costs so as to maintain your profit margins do so as soon as you can.
This probably shines some light on Rio’s haste in bringing the Simandou iron ore project in Guinea closer to being in operation.
The company’s investment plan at Simandou will be used in detailed design studies, early works and long-lead items.
This is primarily for rail and port infrastructure with first commercial production planned for mid-2015.
Rio said its plan at Simandou entails staged funding approvals with its partners for a progressive ramp up of the operation.
The company envisages it becoming a long-life, low-cost operation producing one of the highest grade iron ores on the market.
It could also be described as an emerging product hub operating at much lower costs than its Australian counter-operation.
“The investment we and our partners are making in Simandou takes us a step further towards the phased development and ramp up of a new world-class iron ore resource,” Walsh continued.
“Further investment will be made as the Government of Guinea progresses its financing strategy and grants approvals for the next steps in developing rail and port infrastructure.
“The experience gained in expanding our Pilbara operations will be invaluable as we develop Simandou.”
The cynics out there may feel that it could be Rio could just want to deplete its Pilbara mines as quickly as possible in order to focus more attention to, and take more profits from, Africa.