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Rio Tinto (LSE:RIO) shares were up 49.50 pence to 3,100.50 today as the company dominated financial headlines on several continents. Rio’s share price had been in decline since 03 February through to 01 June, when it reached a low of 2,772. As the upward trend continued today, it may be that long-haul investors are on-board with the actions the company is taking to fulfill its commitment to expansion of profitable operations.
Background
Many observers have been expecting major cut-backs following a year-long corporate strategic review, especially since Rio gave indications in late 2011 that it was considering divestment or closure of thirteen aluminum production and processing facilities in response to the declining price of aluminum on the London Metal Exchange. Although this may still happen, today’s news indicated that the move would be only a small part of a much larger plan to focus on investment in and expansion of its most profitable assets.
Iron Ore Investment in Australia & Guinea
Rio announced that it will invest $3.7 billion in iron ore production in Australia with the goal of gaining a 25% increase in output by 2016. Another $1.5 billion will be invested by JV partners, for a total investment of $5.2 billion. The company plans to invest an additional $500 million in infrastructure development for an iron ore prospect in Guinea. Whilst investment in the expansion of iron ore production may seem a little dubious given current economic conditions and an apparent slowing demand from China, Rio believes that the near-term investment will yield exception long-term results. The company is quick to remind investors that iron ore has become the new gold as supply and demand has driven its sale price to $135 per tonne, yielding over $100 profit per tonne for the most efficient producers. The target of 353 million tonnes per year would position Rio to be able to supply one third of the world’s demand for iron ore.
CEO Tom Albanese said:
“We are mindful of short term uncertainties and remain fully committed to a balanced approach to investment, while maintaining a single “A” credit rating and a progressive dividend policy. We continue to see positive prospect for medium to long term . . . demand driven by ongoing growth in Chinese consumption. We are directing investment to projects that will generate the most attractive returns for shareholders and are resilient under any probable macroeconomic scenario.”
Copper Investment in Utah
Rio will be investing $660 million in its Kennecott Utah Copper Bingham Canyon mine as part of its unfolding strategic plan. The expenditure, spread over a period of seven years, will extend the life of the mine and additional eleven years to 2029. The company indicated that it would continue to evaluate the potential for additional expansion and life extension. The current expenditures will be used for infrastructure construction and new equipment necessary for the pushback of the mine’s south wall. The company estimates that this will result in annual production rates of 13.8 thousand tonnes of molybdenum, 180 tonnes of copper, and 185,000 ounces of gold for the ten years from 2019 to 2029. Andrew Harding, CEO of Rio’s Copper Division, summed it up simply, saying, “We continue to evaluate underground options that will further extend the life of Bingham Canyon, which has already been in operation for more than 100 years.”
Power Station in Mozambique
Rio has budgeted over $1 billion to construct and operate a coal-fired power station capable of producing 2,000 megawatts of electricity from its Benga coal mine in the province of Tete. The company is looking for a strategic partner for the venture which is projected to create more than 1,500 new jobs during the construction phase. Construction is slated to commence in 2014 and with the plant to be operational by 2017. During that time Mozambique must complete a new transmission line from Tete to the port city of Maputo, a distance of over 1,500 km, nearly half the length of the country, at a cost of $2 billion. Eric Finlayson, Managing Director of Rio Tinto Coal Mozambique said, “We believe this project is a very attractive business opportunity.”
Company Spotlight
Rio Tinto is the world’s third largest mining company and the world’s second largest miner of iron ore. Rio is the official supplier of the gold, silver, and bronze used to manufacture the 4,700 medals for the 2012 Olympics. It is the largest mining company, and the 9th largest company of any kind, listed on the London Stock Exchange. The company will celebrate its 140th anniversary in 2013.
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