Rio Tinto Iron Ore

Iron ore con­tin­ues to be a key driver for Rio Tinto, de­liv­er­ing more than 65 per cent of its un­der­ly­ing earn­ings in the first half of 2018. Now, with coal out of the pic­ture, the miner has plans to grow its Pil­bara busi­ness and – if the right op­por­tu­nity

The Australian Mining Review - - CONTENTS - ELIZ­A­BETH FABRI

RIO Tinto has shed al­most $US5 bil­lion in as­sets from its port­fo­lio over the last year, let­ting go of its Kestrel, Hail Creek and Winch­ester South coal projects in QLD, as well as one of its Euro­pean alu­minium smelters; Dunkerque.

It’s a new era for the dual-listed An­glo-Aus­tralian miner.

Coal has been a large part of its busi­ness for years, and its exit from the com­mod­ity gives a cashed-up Rio ad­di­tional ca­pac­ity to grow across its other di­vi­sions.

How­ever, it is iron ore that will con­tinue to dom­i­nate earn­ings for the near-fu­ture as the com­mod­ity rips higher on steady Chi­nese de­mand.

At a re­cent in­vestor we­b­cast, Rio Tinto chief ex­ec­u­tive Jean-Sébastien Jac­ques told share­hold­ers the com­pany was open to di­ver­si­fy­ing into bat­tery met­als – like cobalt and lithium – but to not be sur­prised if the share of iron ore in its port­fo­lio re­mained the same.

“If you ask me where the com­pany could be in 10 years down the road, hav­ing a high level of diver­si­fi­ca­tion – iron ore, cop­per, alu­minium, baux­ite and po­ten­tially other com­modi­ties – would be a great thing,” Mr Jac­ques said.

“At the same time, don’t be sur­prised if the share of the iron ore busi­ness in five or 10 years down the road is ex­actly the same as it is to­day.

“Our world-class iron ore busi­ness is re­ally world-class; in the first half of this year we de­liv­ered a 67 per cent EBITA mar­gin.

“This busi­ness has con­sis­tently de­liv­ered EBITA mar­gins above 50 per cent for the last 20 years – this is a fan­tas­tic as­set that we will con­tinue to develop, and there is noth­ing wrong with hav­ing lots of iron ore in our port­fo­lio at this point in time.”

Rio Tinto’s Pil­bara op­er­a­tions pro­duced 168.8 mil­lion tonnes (Rio Tinto share 140.5 mil­lion tonnes) in the first half of 2018, seven per cent higher than the same pe­riod of 2017.

June quar­ter pro­duc­tion of 85.5 mil­lion tonnes was also seven per cent higher than the pre­vi­ous year, which can be at­trib­uted to favourable weather con­di­tions, the ramp up of Sil­ver­grass, and pro­duc­tiv­ity im­prove­ments.

“We have re­ported an­other strong set of re­sults with un­der­ly­ing EBITDA of $9.2 bil­lion and op­er­at­ing cash flow of $5.2 bil­lion,” Mr Jac­ques said.

The strong half has Rio Tinto placed to land at the up­per end of its ex­ist­ing FY19 pro­duc­tion guid­ance of be­tween 330,000 and 340,000 mil­lion tonnes of iron ore.

Pil­bara Growth

Over the next 12 months, Rio has some big plans – and de­ci­sions to make – for its Pil­bara busi­ness.

In 2017, the miner cel­e­brated the open­ing of its $US338 mil­lion Sil­ver­grass mine, adding an ex­tra 10mtpa of high-qual­ity ore to an­nual pro­duc­tion to sus­tain the long-term vi­a­bil­ity of its Pil­bara blend.

Next up is its $US2.2 bil­lion 40mtpa Koodaideri mine, set to re­place ex­ist­ing pro­duc­tion in the Pil­bara.

Last year, the miner poured $30.9 mil­lion into a fea­si­bil­ity study for the green­fields project, and in Au­gust this year ap­proved fund­ing of $146 mil­lion to un­der­take ini­tial work.

The funds would go to­wards de­tailed en­gi­neer­ing work, in­clud­ing the de­vel­op­ment of a rail con­struc­tion camp, and the first stage of the Koodaideri ac­com­mo­da­tion camp.

“This is an im­por­tant step for our Koodaideri project which will be a sig­nif­i­cant leap for­ward for the global min­ing in­dus­try and Rio Tinto,” Rio Tinto Iron Ore chief ex­ec­u­tive Chris Sal­is­bury said.

“We’ve been build­ing mines in the Pil­bara for over 50 years, and, sub­ject to fi­nal ap­provals, Koodaideri will in­cor­po­rate all of that knowl­edge to en­able us to build the smartest, safest and most ef­fi­cient mine we’ve ever con­structed.

“The de­ploy­ment of lead­ing edge tech­nol­ogy will de­liver a step-change in both safety and pro­duc­tiv­ity for our busi­ness.”

At the Septem­ber AusIMM Global Min­ing Lead­ers con­fer­ence Rio Tinto Growth and In­no­va­tion group ex­ec­u­tive Stephen McIntosh said there were a “suite of tech­nolo­gies” planned for Koodaideri.

“It’s an iron ore de­vel­op­ment be­ing stud­ied and planned to be our most ad­vanced mine yet,” Mr McIntosh said.

“Dig­i­tal de­sign, ad­vanced data an­a­lyt­ics, ma­chine learn­ing, con­trol loop op­ti­mi­sa­tion and au­to­ma­tion all fea­ture strongly.

“We will lever­age dig­i­tal twins in both con­struc­tion and op­er­a­tion [and] we plan for it to be our first fully pa­per­less mine.

“It con­tin­ues our work de­liv­er­ing a fully in­te­grated sys­tem bring­ing to­gether the mine, process plant and rail sys­tem in­clud­ing Au­toHaul.”

A fi­nal in­vest­ment de­ci­sion was ex­pected by the end of this cal­en­dar year, and if ap­proved con­struc­tion would be­gin in 2019, with first pro­duc­tion in 2021.

As part of con­struc­tion, more than 2000 jobs will need to be filled, with 600 per­ma­nent roles dur­ing the op­er­a­tion phase.

Rio was also busy across its other op­er­a­tions in the Pil­bara, with a $US39 mil­lion stacker re­place­ment project un­der­way at its Parabur­doo mine.

In June, the com­pany un­veiled plans to re­place two 46-year-old stack­ers at the project, which had been part of the mine’s orig­i­nal in­fra­struc­ture.

Fab­ri­ca­tion will be­gin this year, with in­stal­la­tion and com­mis­sion­ing sched­uled to be com­pleted by 2020.

“This is great news not only for Parabur­doo, but also for jobs here in WA,” Mr Sal­is­bury said at the time.

“This project is an im­por­tant part of our sus­tain­ing cap­i­tal pro­gram for 2018 and we’re pleased to be sup­port­ing lo­cal busi­nesses with this sig­nif­i­cant body of work.”

Fea­tures of the new stack­ers in­cluded an anti-col­li­sion sys­tem with GPS back up; full au­to­ma­tion and mon­i­tor­ing ca­pa­bil­i­ties from Rio’s op­er­a­tions cen­tre in Perth; mod­ern ad­vances in en­gi­neer­ing de­sign and me­chan­i­cal tech­nol­ogy; and lat­est gen­er­a­tion vari­able-speed drive con­trol and fi­bre op­tic net­work in­fra­struc­ture.

The au­to­ma­tion of Rio’s Pil­bara train sys­tem, Au­toHaul, was also hit­ting mile­stones.

In July, the com­pany com­pleted its first de­liv­ery of iron ore by an au­tonomous train, with full im­ple­men­ta­tion of the pro­gram ex­pected by the end of 2018.

The 280km train jour­ney trans­ported about 28,000 tonnes of iron ore from a Rio site in Tom Price to the port of Cape Lam­bert, which was mon­i­tored re­motely by Rio’s Perth team – more than 1500km away.

Chal­lenges

De­spite pos­i­tive growth in the Pil­bara, group cash costs rose by $US392 mil­lion in the first half of 2018, after five con­sec­u­tive years of re­duc­tions.

Mr Jac­ques has flagged in­fla­tion as an is­sue for some time, namely ris­ing raw ma­te­rial costs.

“Let’s be clear, in­fla­tion is go­ing to hit, it is hit­ting all com­modi­ties and all play­ers across the in­dus­try,” he said.

“In­fla­tion is com­ing and there­fore it is even more im­por­tant for us not only to ap­ply the mine to mar­ket (pro­duc­tiv­ity pro­gram) to our ex­ist­ing as­sets but ap­ply our mine to mar­ket ap­proach to the cap­i­tal space as well,” he said.

How­ever, his views of ris­ing in­fla­tion haven’t been shared by in­dus­try peers.

In an in­vestor call, BHP chief ex­ec­u­tive An­drew Macken­zie said the com­pany was see­ing “the usual things” with in­fla­tion on items such as sul­phuric acid, diesel and steel, and labour costs, but was “not as af­fected by that on a net ba­sis as you might think”.

Wood­side chief ex­ec­u­tive Peter Cole­man also talked down in­fla­tion pres­sures, claim­ing wages were in­creas­ing slowly at be­tween 3 and 4 per cent.

“I’ve just been on a road­show and I’m get­ting asked about price in­creases in the Pil­bara,” Mr Cole­man told The Aus­tralian Fi­nan­cial Re­view.

“It’s not a good mes­sage be­cause the an­swer for us is we are not. It was a broad brushed state­ment but it had re­ver­ber­a­tions. Peo­ple are scep­ti­cal about our costs. It’s ac­tu­ally scar­ing in­vestors.”

Look­ing Ahead

When asked about any M&A op­tions over the course of the next few years, Mr Jac­ques said the com­pany was look­ing at mul­ti­ple op­por­tu­ni­ties but would only pur­sue M&A if it cre­ated sig­nif­i­cant value for share­hold­ers.

“We have looked at some op­por­tu­ni­ties re­cently but at this point in time, noth­ing re­ally ex­cites us,” Mr Jac­ques said.

“How­ever, you never know, maybe one day we will find one which cre­ates a lot of value.

“Hav­ing said that, I think it’s im­por­tant to un­der­stand that we have plenty of op­por­tu­ni­ties to grow; we don’t need M&A to grow for the sake of it.

“We con­tinue to in­vest in the iron ore busi­ness in the Pil­bara, WA.

“We are also in­vest­ing as we speak in Am­rum, which is a very large baux­ite project in QLD, and we con­tinue to in­vest in our cop­per and gold project Oyu Tol­goi in Mon­go­lia.”

“In­fla­tion is com­ing and there­fore it is even more im­por­tant for us not only to ap­ply the mine to mar­ket (pro­duc­tiv­ity pro­gram) to our ex­ist­ing as­sets but ap­ply our mine to mar­ket ap­proach to the cap­i­tal space as well.”

Al­lim­ages:RioTinto.

Rio Tinto’s Sil­ver­grass iron ore mine of­fi­cially opened in 2017.

Rio Tinto’s Iron Ore chief ex­ec­u­tive Chris Sal­is­bury and WA Pre­mier Mark Mc­Gowan on site at Parabur­doo.

Part of Rio Tinto’s fleet of au­tonomous haul trucks in the Pil­bara.

Rio Tinto chief ex­ec­u­tive Jean-Sébastien Jac­ques.

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