Rio Tinto to Go Ahead With $5B Pilbara Expansion Despite Weak Price for Iron Ore

The world’s second-largest miner, Rio Tinto (ASX: RIO) will push through with its $5 billion plan to expand the Pilbara iron ore mine despite the lower price of iron ore in the international market. The mining giant has planned the expansion in 2011.

The decision to push through is because of Rio’s target to produce 360 million tonnes of iron ore per annual. Although shareholders had been pushing Rio to preserve the money and hold expansion, Rio Chief Executive Sam Walsh told analysts in London the Pilbara mine expansion Is inevitable, but the mining giant still needs to specify the timetable under the current plan which the Rio board will deliberate for approval in November.

He said Rio could be flexible with the planning in terms of timetable for the completion of the venture.

“What will drive the expansion will be what the market demands physically. We are going to be very rational and logical about this to ensure we are delivering value to shareholders and not just proceeding with something because it’s on the books,” Mr Walsh explained.

Analysts believe Rio would approve the Pilbara expansion before the end of 2013.

However, the plan by Rio to mine the Koodaiden deposits would likely be opposed by environment groups because it lies next to the Karijini National Park. The mine is about 100 km west-northwest of Newman, and has the potential to produce 35 metric tonnes per year which could even rise to 70 by 2030.

Rio plans to mine the area with a sequence of open cuts. Most of the puts are above the water table with only minor dewatering needed.

Fortescue and Rio plot Pilbara expansion

Rio Tinto and Fortescue Metals Group are confident they will keep growing their Pilbara iron ore operations despite a concerted push by many investors for more cash to be returned.

Rio chief executive Sam Walsh told an analyst briefing in Sydney that the miner’s board was likely to approve $US4.3?billion of spending on iron ore mine expansions needed to take capacity to 360?million tonnes by 2015.

And at the opening of Fortescue’s Firetail mine in the Pilbara, chief executive Nev Power outlined plans to boost production by a further 10?per cent to 170?million tonnes at a minimal cost after it completes a $US9?billion expansion plan by the end of this year.

Both mining companies indicated they are well aware that investors are seeking higher dividends and share buybacks, particularly after Woodside Petroleum issued a special dividend and raised its payout ratio last month.

But Fortescue chairman Andrew Forrest said the miner could be “both a yield and a capital growth company. It doesn’t have to be one or the other.”

Fortescue disappointed investors in February when it held back on paying an interim dividend despite paying one six months earlier. But it unveiled plans to move to a fixed payout ratio of 30 to 40?per cent in the future.

Mr Forrest, who owns 33?per cent of the miner he founded, said Fortescue would resume dividends as soon as it was “responsible” to do so.

‘Best project in the Rio portfolio’

Mr Walsh admitted to analysts that in recent investor meetings, some fund managers had questioned whether Rio should proceed with its iron ore expansion or return the cash to shareholders. Rio has been looking to sell non-core assets and clamp down on costs in an effort to maintain a single-A credit rating currently on negative watch.

But analysts that attended the briefing said it appeared the expansion was likely to be approved by the board in the fourth quarter despite some recent market speculation it could be delayed.

“The message was, barring a black swan event in North Korea, the project is likely to go ahead,” JPMorgan analyst Lyndon Fagan said. “It was confirmed as the best project in the [Rio] portfolio. We would be surprised if they cancelled that project despite the noise around.”

However, another analyst said his view was that delaying the project would be a “really good signal” to the market about capital discipline. Rio has already approved the necessary infrastructure spending and will lift its production capacity from 290?million tonnes by the third quarter of this year.

Mr Walsh and new chief financial officer Chris Lynch met with analysts on Monday and were joined by Rio chairman Jan du Plessis at an earlier investor meeting. It is the first round of in-person briefings Mr Walsh has done in Australia since taking on the top job in January. The miner’s annual meeting is in Sydney on Thursday.

On to the next phase

At the Firetail mine opening, Mr Power indicated the company’s expansion to 155?million tonnes of annual production would mark the end of the company’s major construction phase.

He foreshadowed that would be followed by an “efficiency” phase that could lift production by a further 5?per cent to 10?per cent. “We see the next phase beyond 155?[million tonnes per annum] as optimising, de-bottlenecking and increasing the productivity of the assets that we have,” Mr Power said. “The quality of these assets is fantastic. There is a lot of incremental volume that can be put through these facilities with no additional capex.”

Fortescue is expected to approve construction of a $US250?million fifth berth at Port Hedland in the 2014 financial year to boost its port capacity to around 180?million tonnes.

NRW Holdings Nabs $180 Million Contract for Rio Tinto Iron Ore Mine

Mining services firm NRW Holdings has won a contract worth $180 million to work on Rio Tinto’s Nammuldi iron ore mine in the mineral rich Pilbara region of Western Australia.

The project will encompass the provision of mine service facilities, a stockyard and explosives compound, as well as bulk earthworks for the processing plant.

The contract also calls for road works and the construction of a rail connection with a train loading facility.

The project is expected to require a peak workforce of more than 400 employees. Work is slated to begin in May and will continue for 37 weeks.

NRW’s new contract with Rio is part of broader efforts by the diversified mining giant to expand its Nammuldi iron ore mine, situated around 60 kilometres to the north-west of the Pilbara town of Tom Price.

The expansions will enable the mine to extract iron ore from beneath the water table, nearly tripling its production capacity from eight to 23 million tonnes a year.

While Australian engineering firms have been hard hit by the mining industry slump and the widespread annulment or deferral of key projects by miners, NRW has managed to defy the sector-wide malaise and win a string of lucrative contracts for work on iron mines in the Pilbara.

Last month, NRW won a $67 million contract for Gina Rinehart’s iron ore mine, located 115 kilometres north of Newman, for the provision of earthworks, piping and other work related to drill and blast operations.

In October of last year, the company obtained a $90 million contract to assist in the expansion of Yandicoogina iron ore mine as part of Rio Tinto’s Yandi Sustaining Project. NRW is providing a raft of construction services under the contract, including over a million cubic metres of excavation and more than 500,000 cubic metres of embankment construction.

In February, NRW obtained a four-year drilling contract worth $140 million for Fortescue Metal’s Cloud break iron ore mine, situated in the Pilbara’s Chichester Range.

Other mining services firms have not fared so well amidst the mining sector slowdown and ailing demand from key export market China.

Engineering services consultancy Coffey International has indicated that second half pre-tax profits will fail to meet the $23.7 million that the company brought in during the first half of the fiscal year, which ended in December 2012, as a result of weak commodities prices.

Engineering and infrastructure firm Downer EDI also slashed 106 positions at the Boggabri coalmine, operated by Japanese trading house Idemitsu in the Gunnedah Basin coalfield of NSW, as a result of a downgrade in production targets due to tepid prices for thermal coal.

Rio cancels Pilbara accommodation project

Rio Tinto has cancelled its Rocklea Palms Pilbara accommodation expansion project.

The miner originally awarded Diploma the $44 million contract for the FIFO accommodation project in Paraburdoo in July.

However Rio has now advised the contractor that the project will not proceed beyond the building licence documentation phase, and is terminating the entire project on 29 November.

According to Diploma “the project has been deemed ‘non-essential’ in the current expansion program for Rio Tinto and as a result the project has been put on hold indefinitely”.

Despite this Diploma is still required to carry out the work for the submission of the building licence application for the accommodation units, dry mess, and kitchen.

While it has cancelled this project, Rio did confirm that the $49 million contract for the expansion of its Wickham Accommodation project is still going ahead, stating that it “is still very much on foot and is an essential part of Rio Tinto’s expansion plans”.

It is part of Rio’s wider $300 million Wickham expansion.

The Wickham Town Expansion Phase 2 project will create a new Wickham South subdivision and includes 212 new dwellings, 25 residential lots, the installation of 198 new high quality FIFO accommodation units, the construction of a new 1600 metre square town administration and training centre for both the company and community, as well as the new public recreational parks.

Mining services in slowdown

PROJECT cancellations and profit downgrades are mounting as the mining services sector confronts its post-boom future.

In announcements late on Friday, two groups servicing the mining sector said contracts with large mining companies, including Rio Tinto, had been cancelled or were not expected to be renewed, while Orica revealed a $367 million write-down.

Diploma Group said it would not proceed with 244 single rooms for fly-in-fly-out Rio Tinto workers near Tom Price in the Pilbara, while equipment leasing group Emeco said hiring rates in Australia were much lower than expected.

Emeco has been looking offshore, and has shipped a fleet of trucks to Chile, where copper mining is ”robust” and growing.

Orica’s decision to write down the value of its Minova equipment division will slash its profit to $400 million, well down from analyst forecasts of about $650 million for the year. Orica’s results for the year to September 30 are due out on Monday morning, while explosives manufacturer Incitec Pivot releases its results on Tuesday.

The announcements follow the Reserve Bank’s decision of Friday to cut its forecast for Australia’s GDP growth in 2013 to between 2.25 per cent and 3.25 per cent, from between 2.5 per cent and 3.5 per cent.

The RBA said: ”The profile of capital spending on iron ore and coal in 2013 and 2014 has now been revised lower.”

The experience of these companies supports conclusions from Deloitte Access Economics that the peak of the ”construction leg of the mining boom” is now approaching.

”This construction boom is likely to peak in 2014 as fewer projects move through planning over time to replace the large swathe of projects which will be completed,” the firm’s investment monitor for September found.

The total value of projects increased by $6.2 billion, or 0.7 per cent, between June and September, but the value of ”projects in planning” was $10.6 billion lower at the end of September.

”While the quantum of projects in planning had moderated a little over the past year, some of those on the drawing board may be further from the green light now than they were three or six months ago, given the downturn in global commodity prices and concerns over China’s development path in the short term.”

Diploma Group’s $44 million contract to build the rooms for Rio near Tom Price was its first with Rio and was announced in July this year. Just four months later the housing project is now ”non-essential” to Rio’s expansion plans.

Emeco said that only 66 per cent of its equipment in Australia was in use at present, down from 76 per cent in August. This is far below the ”average utilisation of 91 per cent” in the first half of 2011-12.

Specifically, two goldmines in Western Australia did not renew contracts and iron ore miners were unlikely to re-hire equipment until early 2013. Emeco does not expect several coalminers in New South Wales and Queensland to renew their contracts.

In September iron spot ore prices dropped below $US100 a tonne for the first time since 2009, but have since recovered to about $US120 a tonne.

Economics & Beyond chief economist Jeff Oughton said confidence in the mining sector was still low because of uncertainty about what will happen to China’s economic policy when a new leadership team emerges from this week’s National Party Congress in Beijing.

There is also concern about Europe’s economic recovery and how a re-elected Barack Obama will deal with calls for spending cuts and tax increases in the US.

However, putting mining projects on ice does not mean they will not be built.

”This is about new capacity coming on stream and, one, they have been running into lower prices than potentially hoped for; and, two, they are running into higher costs and the availability of skilled workers to get [the projects] done,” Mr Oughton said.

Read more:

Big miners regaining favour

Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines. This article was originally published by Investor Weekly, a Sterling publication.

What a difference a few weeks makes. In September, newspaper headlines screamed about the meltdown in iron ore prices, and resource stocks tumbled. Commentators called an “end” to the mining investment boom amid fears that China’s economy was heading for a hard landing.

After tanking to US$88 a tonne last month, the iron ore price has rebounded to US$120 a tonne. Fortescue Metals Group (FMG) this week said it expects the iron ore price to stablise at current prices; Macquarie Equities Research sees a floor of US$115 over the next few years.

The big mining stocks have followed the iron ore price higher. Australia’s third-largest iron ore miner, Fortescue, has stunningly rallied from below $3 in September to $4.07. Macquarie has an outperform recommendation on it.

Rio Tinto (RIO) has jumped from a 52-week share price low of $48.37 to $56.05, and BHP Billiton (BHP) has rallied from an annual low of $30.09 to $33.45. Their prices are still well down on peak levels over the past 12 months, but sentiment has improved markedly from a few weeks ago.

Macquarie has outperform recommendations on Rio and BHP. Its 12-month share price targets of $76 and $39 respectively for Rio and BHP suggest considerable upside and a catalyst for a sharemarket rally in 2013 given the high weighting of these stocks in the S&P/ASX 200 index.

Several small and mid-size resource stocks are also starting to rally, after heavy falls this year.

Solid quarterly production reports from the big miners have also buoyed investors, and reports last week of better-than-expected Chinese export data led to calls that its economic slowdown may have bottomed.

A resumption of stronger Chinese growth would support higher commodity prices and potentially higher share prices of leading ASX-listed resource stocks.

Mining services stocks with heavy iron ore exposure, such as NRW Holdings (NWH), also rallied this week after sharp falls in recent months. Tumbling iron ore and coal prices raised fears that more mining projects would be cancelled or deferred, in turn leading to less work for service providers.

Conditions are not as strong as a year ago, but fears about some mining services stocks may have been overstated.

Rio Tinto logs record iron ore output in the Pilbara

Diversified mining giant Rio Tinto (ASX:RIO) has raised iron ore output 5% year-on-year in the third quarter on the back of record production levels in Western Australia’s Pilbara.

According to the company’s latest quarterly operations report Rio Tinto is maintaining a production target of 250 million tonnes this year following the output increase.

Most of the iron ore output came from Rio’s mines in Western Australia’s mineral rich Pilbara region, which posted a quarterly production record to push Q3 output to 67 million tonnes and output for the nine months through September to 177.1 million tonnes.

The Australian reports that the company is now forging ahead with plans to raise production capacity in the Pilbara from 230 million tonnes at present to 283 million tonnes by the end of 2013 and 353 million tonnes by the middle of 2015.

The vigorous output gains and ambitious expansion plans stand in stark contrast to the general state of the Australian resources sector, which is pursuing a raft of retrenchments and cost-cuttings in the face of heavily adverse conditions.

Operating costs have risen, the Australian dollar is riding high due to its new status as a safe-haven purchase, while tepid demand from a slowing Chinese economy has triggered precipitous declines in commodities spot prices.

Rio has nonetheless expressed optimism with respect to iron ore, believing that the recent price rebound and the widespread exit of Chinese suppliers from production bodes well for the near future.

Rio says Pilbara ramp-up on track

Mining giant Rio Tinto says its planned ramp-up of iron ore production in the Pilbara to 353 million tonnes per annum by 2015 remains on track despite “volatile markets”.

Reporting another record quarterly iron ore production figure of 63 million tonnes in the three months to the end of September, Rio Tinto chief executive Tom Albanese said the company remained resilient to fluctuating demand and prices because of it strategy of running large, long-life, cost-competitive operations

Pilbara iron ore production was up 5 per cent on the third quarter of 2011 while global iron ore production was also up 5 per cent to 67 million tonnes.

Year to date global iron ore production of 187 million tonnes was up 4 per cent on the same period of 2011.

Pilbara production for the nine months to September was 177.1 million tonnes, also 5 per cent higher than the corresponding period in 2011.

“Production continued to exceed sales as the business prepared itself for the expansion to 283mtpa (by the end of 2013), with a measured build-up of stocks at the mine sites,” the company said.

“Third quarter sales of 61 million tonnes were 3 per cent higher than the third quarter of 2011, and year to date sales of 170 million tonnes were 4 per cent higher than the corresponding period in 2011.”

Rio Tinto said it expected to produce about 250 million tonnes of iron ore from its global operations in Australia and Canada, subject to weather constraints.

At Argyle diamond mine, rough diamond production for the third quarter was 7 per cent higher than the previous corresponding period, as marginally lower tonnes processed were more than offset by higher grades, the miner said.

Production was 46 per cent higher than the second quarter of 2012 because of a combination of access to a high grade region of the pit and increased plant reliability.

Construction of the underground mine was proceeding and production was scheduled to begin in the first half of 2013, with ramp up to full operation by 2015.

Third quarter production of 1.8 million tonnes at Dampier Salt was 2 per cent higher than the third quarter of 2011.

Year to date production of 5.2 million tonnes was 10 per cent higher than the corresponding period in 2011, due to the impact of adverse weather during the first quarter of 2011.

Mr Albanese said copper, bauxite, alumina and titanium dioxide production were all higher than in the same quarter of 2011.

Rio shares were off 70 cents, or 1.3 per cent, to $55.12 at the close.

Rio Tinto becoming more optimistic on iron ore prices

RIO Tinto is becoming more optimistic about the outlook for the iron-ore market following a recent partial price recovery for the steel-making ingredient.

“We probably look forward with a little bit more optimism than we did perhaps a month or two ago when we were still in the midst of seeing declining prices and no-one really knew when it was going to bottom out,” Greg Lilleyman, president of Rio Tinto’s Pilbara iron-ore operations, said today.

Meanwhile, Rio Tinto has noticed a response from China’s mining sector to the lower prices, including the “exit” of some higher-cost Chinese iron-ore producers, Mr Lilleyman said at a seminar in Perth.

“We believe that will hopefully help in limiting further downside in prices,” he said.

Prices should also be supported by slower-than-expected growth in seaborne iron-ore supply due to rising costs and project delays in several countries, including Australia, he said.

Rio Tinto, unlike some of its Australian competitors, hasn’t chosen to slow down expansions of its Pilbara iron-ore business in response to the lower prices. Its current expansion, to 353 million tonnes a year, is due to come on stream in 2015.

However, earlier this week Rio Tinto pledged to tackle costs across its operations and said it wasn’t likely to approve any big, new capital-intensive projects in the near term in view of a slump in commodity prices and a faster-than-expected cooling of China’s economy.

The miner still expects to invest roughly $16 billion in capital projects this year, but spending would likely decline in the coming years, the company said.

Rio Tinto to produce hay in the Pilbara

The miner Rio Tinto is pushing ahead with plans to use excess water from one of its WA Pilbara mines to produce hay to feed cattle.

The multi-million-dollar Hamersley Agricultural Project will be commissioned today with the aim of producing 30,000 tonnes of hay a year from 830 hectares of land growing oats and pasture grass.

The project is expected to use about 20 gigalitres of surplus water a year from Rio’s Marandoo Mine.

Rio’s Allan Jackson says the bulk of the hay will be used on Rio’s five pastoral stations in the Pilbara, but he expects a sizeable portion to be sold to other cattle stations.

“We’ve just got to figure out what we’re going to need on our own cattle stations but probably 40 per cent of that could be available for sale and some pastoralists have expressed some interest,” he said.

He says it is a unique project for the company.

“We’re planning to start seeding on Thursday this week and then the first cut we’ll be looking at before Christmas,” he said.

“That’s dependent on how it goes but we think it will be before Christmas, at least.”