Rio Tinto’s New Attempts

By Kishori Krishnan Exclusive to Iron Investing News

Still smarting from its failed attempt to buy into the Australian mining giant Rio Tinto, Beijing is making a new bid to secure its supply of iron ore. Looking to mend fences with China, the company is working overtime to heal rifts caused by the collapse of the Chinalco deal and the arrest of four employees by Chinese authorities.

The head of Rio Tinto PLC is trying to repair his company’s troubled relationship with China following the arrest of four Rio executives in a corporate espionage scandal and the collapse of a US$19.5-billion investment deal with a state-backed Chinese mining firm.

Tom Albanesesays he is “disappointed” that Rio failed to complete the agreement with Aluminum Corpof China (Chinalco). Rio opted instead for a $15-billion stock sale to raise desperately needed capital, and for an iron ore joint venture with rival and former suitor BHP Billiton Ltd that drew criticism from Chinese bureaucrats.

The Rio chief executive officer said his company has held preliminary discussions with Chinalco executives and other Chinese officials about new potential joint investments. “Those relationships are very important. Certainly from a Chinalco perspective, in the long term I think there are things we can do together,” Albanese said in an interview with Bloomberg Radio. “We have a number of challenges in China at the moment.”

London-based Rio’s rapport with its largest customer has deteriorated dramatically since the collapse of the Chinalco deal in June. The company has, in recent months, endured fractured negotiations on annual iron ore contract prices and the arrest of four employees by Chinese authorities, including Rio’s top iron ore executive in China, on charges of bribery and theft of commercial secrets.

While Rio has refused to relent on its offer to China of a 33-per-cent reduction in iron ore prices, Albanese’s comments show that the company is intent on healing the major rift that has developed with the Asian economic superpower. They may also indicate that Rio could be willing to make concessions in order to secure the release of its workers.

“China remains a crucial customer to Rio Tinto and the somewhat soured relationship has to be mended,” said Tony Robson, an analyst with BMO Nesbitt Burns in Toronto.

China beacon

China has been a beacon of hope for the mining industry amid the global economic recession. A $586-billion government stimulus package has spurred a rush of commodity buying, including iron ore and copper needed for a slew of massive infrastructure products. Aggressive stockpiling of copper and other metals by China has also created a floor on prices and supported a dramatic price rebound by driving demand.

As major iron ore producers such as Rio Tinto have balked at its demands for a 45-per-cent cut in the contract price, China has begun using its weighty financial resources to try and force a deal. This week, Fortescue Metals Group Ltd, an upstart Australian iron ore miner, agreed to supply the key steel-making ingredient to China at a discount, in exchange for a financing package from China of up to $6-billion.

China has also spent billions of dollars by investing directly in resource projects and companies. Last month, its hulking $200-billion sovereign wealth fund China Investment Corp (CIC) spent $1.74-billion to become the largest B-class shareholder in Teck Resources Ltd., Canada’s biggest base metals miner.

Smothered with nearly $40-billion in debt from its ill-timed acquisition of Montreal aluminum producer Alcan, Rio had originally struck the $19.5-billion investment agreement with Chinalco to reduce its financial liabilities.

However, the deal, which would have seen Chinalco take direct stakes in a number of Rio’s mining operations, raised concerns with politicians in Australia. Rather than risk the potential rejection of the deal by Australian regulators, Rio opted for the stock sale to shore up its balance sheet.

A few weeks after the Chinalco deal collapse, Stern Hu, Rio’s top iron ore executive in China, and three other Rio employees were detained in Shanghai. The official charges of bribery and corporate espionage levelled against the four last week were less serious than the original allegations of stealing state secrets.

To add to the issue, last week, FMG announced a deal in which it would supply iron ore to China at a 35 per cent discount from what Beijing’s steelmakers paid a year ago — a slight price cut, in other words, compared to the deal Rio negotiated with the Japanese and Koreans.

Some industry insiders argued that this was a mere “face saving” deal for the Chinese, and Rio seemed dismissive: “We do not see this pricing agreement as relevant to our pricing for fiscal 2009,” a Rio spokesman said.

That statement was precisely worded — and it’s precisely correct. The deal with FMG has nothing to do with 2009’s pricing struggle. FMG’s current capacity to deliver ore is only about 45 million tons per year. (It will now deliver 20 million tons this year — or about 5 per cent of China’s total expected demand in 2009.)

But sources close to the deal say this year has nothing to do with it. FMG, potentially, is a disruptive force in the global metals game. One banker estimates it has sufficient reserves in Pilbara to deliver eventually some 200 million tons annually to the Chinese — enough to break the Rio Tinto-BHP Billiton stranglehold on the market.

Investing in the infrastructure to develop those reserves is now the subject of FMG’s negotiations with Chinese lenders. FMG seeks some $5.5 to $6 billion in loans. If it gets that much it would refinance some existing debt, but more importantly, it would enable the company to expand production and build a rail spur and other infrastructure it needs to get its ore to market.

Stock market

Brazil’s stock market edged lower on Tuesday as investors cashed in on recent gains even as data from the world’s largest economy showed signs of recovery.
Mining company Vale the world’s largest iron ore producer, slipped 0.6 per cent to 33.40 reais, as copper prices also dropped 1.7 per cent.

Benchmark iron ore prices in China fell to $95 a tonne on Monday, easing 17 per cent from its nearly one-year peak of $115 in early August, as traders said many Chinese steel mills stopped buying ore for future delivery.

Indian ore of 63/63.5 per cent iron content for future delivery was quoted at $95-98 a tonne, including freight costs, while ores for immediate delivery were bid at about 780 yuan ($114) a tonne, industry consultancy Mysteel said on Monday.

Many steel mills in the largest producing country had been purchasing only ores for immediate delivery for at least one week due to the rising uncertainties in the steel market, which has weakened since early August, iron ore traders said.

“Everybody knows the Chinese market is a volatile market, so steel mills bought a lot when the steel market was booming and suspended purchasing as the market is fading,” a Shanghai-based steel trader said. “We should not underestimate the momentum. India iron ore prices are likely to fall to $90 tomorrow as some sellers are impatient now,” said the trader, who works for a major private-sector iron ore trading firm.

Iron ore prices in Chinese domestic markets have been following steel prices closely for months, partly because Chinese steel mills are setting up the volumes of iron ore purchases with their production schemes and cash positions, which are correlated with steel prices.

Fall forecast

Cash iron ore prices may fall to about $70 a metric ton in the “near term” as China, the world’s biggest buyer, cuts purchases, said Rana Som, chairman of NMDC Ltd, India’s top producer of the steelmaking material. “This could happen in a few days,” Som said. The forecast is 26 per cent lower than this year’s peak rate of $95 without freight earlier this month, according to Macquarie Securities Ltd.

China’s stockpiles of iron ore to make steel are at 75 million tons, just 0.6 per cent below levels last September, when they rose to the highest since at least 2006. The cash price for Australian iron ore delivered to China slumped 9.3 per cent on August 21 after Chinese steel prices declined.

Ore prices have likely “topped out” this year as steel prices fell, Liberum Capital analysts said on August 17. The Baltic Dry Index, a measure of commodity-shipping costs, fell 27 per cent this month on concern demand may be slowing. Iron ore swaps for settlement this month traded at $98.31 a ton, according to SGX AsiaClear over-the-counter prices from Singapore Exchange Ltd. They indicate prices may drop to $87 by December.

Company news

Advanced Explorations Inc continues to advance its plans with respect to the potential development of the Roche Bay magnetite (iron) project located in Nunavut, Canada. A program has been implemented that is designed to enhance the firm’s current understanding of the deposit’s metallurgy and proposed iron reduction process. Additional core studies are also being undertaken with the objective to facilitate redefinition of a portion of the current inferred resource to an indicated status. (per NI43-101 standards). The program

John Gingerich, president & CEO of AEI, commented: “The company remains on track to the completion of a Definitive Feasibility Study in 2010. Our Preliminary Economic Study confirmed that we have a very viable project and we remain confident AEI will play a significant role in the Nunavut and Federal Governments’ Arctic development strategy.”

AEI has also announced that it intends to issue a total of 650,000 options to consultants and management at a price of $0.17 per common share exercisable in whole or in part on or before five years.

Advanced Explorations Inc, based in Toronto, Ontario, is a resource development company focused on developing high quality iron ore opportunities. In the spring of 2009, AEI announced a preliminary economic assessment for the project indicating a potential US $2.76 billion net present value, a minimum of 50 years mine life and a return on investment between three and five years.