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
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.”