Rio Tinto Bucks Trend to Bet on Bauxite
November 27 2015 - 5:10AM
Dow Jones News
SYDNEY—Rio Tinto PLC approved a $1.9 billion bauxite project in
northeastern Australia, bucking a trend among major resources
companies that have largely delayed new mines to protect profits
from low commodity prices.
The Anglo-Australian mining company, already the world's biggest
supplier of bauxite into China, aims to capture a predicted surge
in demand by developing its Amrun project, the biggest investment
approved by the board of London-based Rio Tinto this year.
Rio Tinto said the planned Amrun operation, formerly known as
South of Embley, on the Cape York Peninsula of Queensland state
would open in 2019 and initially churn out 22.8 million metric tons
of bauxite a year. Bauxite is a raw material that is used to make
alumina, a key ingredient in the manufacturing of aluminum.
Much of the early output from Amrun will offset declining
production from another mine on the Cape York peninsula—East
Weipa—where ore reserves are running out. The region supplies the
bauxite used to produce roughly 10% of the world's aluminum.
Rio Tinto aluminum chief executive Alfredo Barrios, however,
said the new investment wasn't a defensive play to keep its market
share from shrinking.
"This is about growing the business," he said in an interview.
"The strategy is to grow and capture an opportunity that we see in
the coming years."
Mr. Barrios said Rio Tinto expects China's annual imports of
bauxite to surge to 145 million tons by 2030, from around 45
million a year now. That is underpinned by a decline in
good-quality, local resources of the raw material in China, the
world's top aluminum producer.
Production from the Amrun mine could be expanded to 50 million
tons a year, Rio Tinto said.
"Aluminum is a product with specific characteristics that make
it ideal for the future, in terms of lightness, recyclability and
so forth," Mr. Barrios said. Auto makers and aircraft manufacturers
are eager to make their products lighter to improve fuel
efficiency.
"That demand that we see from China, in keeping up with the
growth in aluminum consumption, requires bauxite as a raw
material," he said.
On Thursday, fellow executive Jean-Sé bastien Jacques—Rio
Tinto's copper and coal chief—said bauxite, along with copper and
iron ore, was one of the commodities the company is most excited
about for the future.
Some analysts are more wary. "Increased bauxite supply into the
traded market to feed the ongoing growth in China alumina and
aluminum capacity is one of the reasons we remain cautious" on
those markets, Citigroup said in a client note.
Mining companies including Rio Tinto have been selling assets,
slowing spending and cutting production of some commodities to
shield profits from weak prices. The downturn in global commodity
markets largely reflects slowing demand from China, which is the
world's biggest buyer of everything from iron ore to zinc.
Rio Tinto reported a net profit of $806 million for the six
months through June, down from $4.4 billion a year earlier. It
slashed its budget for major projects to roughly $5.5 billion for
2015 from more than $17 billion three years ago.
The company invested billions expanding its network of iron-ore
pits and infrastructure in Australia's west in recent years and has
since been criticized for becoming too reliant on the steelmaking
ingredient, which trades at its lowest price in nearly a
decade.
Still, Mr. Jacques on Thursday said it wasn't Rio Tinto's
strategy to diversify for the sake of it. "Diversification has not
proven to, necessarily, be a hedge against bad times, as many had
previously thought," he said.
Instead, he said that the company was focused on "tier-one
assets" and that its optimistic long-run outlook on bauxite gave
management "the confidence to invest."
There are a handful of other investments awaiting signoff by Rio
Tinto's board, including the development of an underground mine at
Oyu Tolgoi in Mongolia and the proposed Silvergrass iron-ore mine
in Western Australia.
However, Rio Tinto has previously also promised materially
increased returns for investors after years of heavy spending—a
pledge followed up with a $2 billion share buyback this year. Mr.
Barrios said he couldn't comment on whether the Amrun investment
reduced the likelihood the company would repurchase more shares in
the year ahead.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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(END) Dow Jones Newswires
November 27, 2015 04:55 ET (09:55 GMT)
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