Rio sees short-term risks, long-term growth

RIO Tinto will spend $US400 million on the Kestrel mine extension project in 2010, despite a cautious short-term commodities outlook and a continued focus on balance sheet strength.
Rio sees short-term risks, long-term growth Rio sees short-term risks, long-term growth Rio sees short-term risks, long-term growth Rio sees short-term risks, long-term growth Rio sees short-term risks, long-term growth

Rio chairman Jan du Plessis and Rio chief executive Tom Albanese. Copyright 2009 Rio Tinto

Blair Price

In reaction to the global financial crisis, the major miner nearly doubled its plans to cut net debt by $10 billion last year.

Rio slashed its net debt from $38.7 billion to $18.9 billion in 2009, reducing the net debt to capital ratio from 63.3% to 29.1%.

A series of asset sales helped strengthen the books throughout the year, with the Jacobs Ranch sale to Arch Coal fetching $764 million of proceeds while the Cloud Peak float and linked debt offering generated $741 million.

Proceeds from a $15.2 billion rights issue further improved Rio’s debt position, but capital expenditure was also cut 37% from 2008 to $5.4 billion and Rio is keeping these costs in line with a $5-6 billion capex budget for 2010.

While $1.1 billion is earmarked for the Hope Downs expansion in its core iron ore business, the Kestrel longwall mine in Queensland’s Bowen Basin is the next main focus of Rio’s capex this year.

The project aims to lift production to 5.7 million tonnes per annum from 2012, extend the mine life to 2031, and increase the longwall face width to 375m.

Rio said the Kestrel project remained on track to meet first scheduled coal production in 2012 but noted the pace of the development had been affected by the economic slowdown last year.

Meanwhile its 50.1%-owned Clermont open cut development will receive a cash injection of $200 million in 2010.

The mine is set to start production mid-year and to ramp up to 12.2 million tonnes per annum by 2013.

Clermont will replace the Blair Athol mine which is expected to close in 2016.

At the end of 2009, Kestrel’s coking and thermal coal reserves totalled 86Mt proved and 81Mt probable, including 64Mt proved marketable reserves and 62Mt probable marketable reserves.

Clermont held 185Mt of proved marketable reserves of thermal coal and 5Mt of probable marketable reserves.

2010 outlook

While referring to 2009 as “a year of two halves” for the company, with commodities demand and markets improving markedly in the second half, Rio chairman Jan du Plessis still exercised caution in the annual review.

“The outlook for mining and metals is improving but remains volatile and uncertain in the short term,” he said.

“The latest leading indicators for developed economies imply that we may have returned to expansionary territory, although no one knows to what extent or for how long.”

He said the key driver for the mining industry continued to be Chinese demand.

“However, we will also need to see OECD economies improve and a resumption in international trade flows to fully support a global economic recovery.

“Similarly, there are concerns about the sustainability of Chinese demand in the short term. Longer term, China is likely to move towards more domestic, consumption-led development.”

Rio chief executive Tom Albanese said major short-term uncertainties remained, but he is confident about long-term growth.

“The exponential growth of China’s demand for iron ore, copper, coal and aluminium is expected to continue over the next 15 years, as the average wealth of many millions of people increases,” he said.

“Their consumption of raw materials will rise accordingly.

“As China nears the top of its commodity-intensity usage curve, India is expected to follow, supporting a further potential wave of strong commodity demand.”

One of his objectives this year is to strengthen Rio’s relationship with China.

“In 2009, it became the most important destination for our products, and influences global pricing of most metals,” he said.

But the Stern Hu affair remains an obvious challenge, with Albanese repeating his call for the completion of an expeditious and transparent legal process.

Rio executive Hu and three Chinese nationals were arrested in Shanghai in July 2009 on suspicions of bribery and corporate espionage.

Meanwhile, Rio energy chief executive Doug Ritchie holds a positive outlook for seaborne coal.

Noting that Rio Tinto subsidiary Coal & Allied entered into long-term take or pay contracts with Port Waratah Coal Services, he said similar contracts for rail track access and rail freight were being negotiated.

Rio’s Australian coal operations yielded earnings of $1.013 billion in 2009, down $708 million from 2008 on the back of lower prices and a change in the sales mix.

Hard coking coal production last year was also roughly in line with 2008, despite the planned longwall changeover at Kestrel in October.

The company’s US coal operations earned $257 million, $100 million higher than 2008.

Rio shares are down 1c to $75.37 by late afternoon.