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RIO Rio Tinto Plc

5,017.00
39.00 (0.78%)
28 Mar 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Rio Tinto Plc LSE:RIO London Ordinary Share GB0007188757 ORD 10P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  39.00 0.78% 5,017.00 5,019.00 5,020.00 5,050.00 4,980.50 5,016.00 3,147,491 16:35:22
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Miscellaneous Metal Ores,nec 54.86B 10.06B 6.1815 8.12 81.65B

Miners Contend With Accelerating Costs -- WSJ

13/03/2018 7:02am

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Fuel, wages, chemicals grow more expensive, posing risk to gains made in turnaround

By Rhiannon Hoyle 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 13, 2018).

The world's biggest mining companies, flush with profits from a recent commodity-market rebound, are grappling with a new challenge: how to keep rising costs from eating into those hard-earned gains.

For much of this decade, mining companies have prioritized reducing how much they spend to dig up each ton of the commodities they sell, after a market slump made it harder to turn a profit. Companies including BHP Billiton Ltd., Rio Tinto Ltd. and Glencore PLC introduced drones and driverless trucks, cut tens of thousands of jobs and sought advice from other industries, including the automobile business, to make their pits more efficient.

Now the sector faces a fresh cost crunch as prices for things including fuel, wages and chemicals begin to climb. Energy bills are rising after an oil rally of more than 20% this past year. Raw materials including coke, which helps to fuel iron-ore smelters, and caustic soda, used to extract alumina from bauxite, are also rocketing higher in price. Workers are demanding higher wages in many countries, including the copper-mining hub of Chile, where truck drivers say better metal prices should translate to fatter pay packets.

A depreciating U.S. dollar versus the currencies of top mining countries is also putting pressure on margins, as commodities are mostly sold using the U.S. currency. The South African rand is up 22% over the past four months.

"Clearly, inflation's becoming a bigger issue," said Anglo American PLC Chief Executive Mark Cutifani. "So we've got to run twice as hard." Costs are increasing for reasons similar to those driving the commodity-market turnaround: a healthier global economy and rising demand.

Mining companies stripped billions of dollars in costs from their operations as they sought to get a handle on budgets that spiraled during the latest commodities boom.

Between 2012 and 2016, copper producers globally slashed their output costs -- the cost to produce 1 pound of metal -- by roughly one-quarter, according to data from S&P Global Market Intelligence. Still, that followed a more-than-tripling of costs in the decade prior to 2012. S&P projects copper-output costs rose in 2017 for the first time in five years.

Right now, higher commodity prices are certainly more than offsetting higher expenses. Commodity prices have climbed roughly 20% since mid-2017, according to the S&P GSCI commodities index, underpinned by a rare period of synchronized economic growth in China, the U.S., Europe and major economies elsewhere.

Mining companies are making significant profits once again. Rio Tinto, the world's No. 2 miner by market value, and rival Anglo American both last month reported a doubling of annual net profit. Glencore said it quadrupled its earnings in 2017.

With fuel and other necessary raw materials getting more expensive, there will be pressure to find fresh cuts elsewhere to protect margins, executives said. A further rise in mining costs could provide a further boost to the commodity-market rally, analysts said, particularly if investors bet on it causing some smaller companies to pare production.

"The one thing that comes with inflation is a better commodity price," said Anglo's Mr. Cutifani. But, he said, "we don't want to rely on rising prices." Mr. Cutifani said Anglo will race inflation to cut the costs it can, targeting an extra US$3 billion to US$4 billion in savings by 2022 through improvements to expenses, productivity and sales.

The return of inflationary pressures already sparked earnings misses for several mining titans during the latest corporate-earnings season, damping their stock-market rally. "Further cost inflation in the mining industry is inevitable, in our view, unless global economic activity slows," said Jefferies analyst Christopher LaFemina, who said BHP and Rio, among others, fell short of his earnings forecasts because of unexpectedly high costs.

Anglo American felt the sharpest sting in its South African coal division, where costs for its export operations jumped 29%.

Rio Tinto forecast cost headwinds of US$300 million in 2018, which would erase half its projected productivity improvements for this year. "We will continue to be tough on costs," pledged Rio Chief Financial Officer Chris Lynch.

Glencore CFO Steve Kalmin said the company was experiencing rising prices in diesel, steel and explosives, among other things. There is also increasing competition for workers, although it's "nowhere near where things were back in the 2007-08" period when there was a scramble for basic skills, he said.

BHP cautioned of pockets of inflation in its petroleum and minerals businesses, although CEO Andrew Mackenzie played down concerns that renewed pressures would dent the miner's bottom line.

"We, as a company, feel confident that we are able to quench that and continue to drive our cost down," he said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

 

(END) Dow Jones Newswires

March 13, 2018 02:47 ET (06:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.

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