Soaring costs trigger Rio coal retreat

Australian Financial Review
3 May 2012

Rio Tinto is reviewing its coal expansion plans as soaring capital costs and investor pressure to return more cash force global miners to reassess spending plans.

One project believed to be under threat is Rio Tinto’s planned $2 billion Mount Pleasant coal project in NSW as escalating cost pressures force the miner to focus on its Pilbara iron-ore expansion plans in Western Australia.

Rio chief executive Tom Albanese, who is in Australia ahead of the ¬global miner’s annual general meeting, raised concerns about the high cost of doing business in Australia when he met with Prime Minister Julia Gillard and Resources Minister Martin Ferguson this week.

Mr Albanese is expected to highlight the pressures of industry-wide cost inflation and the strong dollar at a Macquarie Equities conference in Sydney today.

Rival BHP Billiton is re-evaluating its spending plans, including the $US20 billion expansion of the Olympic Dam mine in South Australia. A weaker outlook for commodities, growing uncertainty over demand from China, added government imposts and pressure from shareholders worried about overspending on large projects are also behind the rethink.

Mr Albanese is expected to tell investors about the future of key projects under consideration. The miner’s first priority in 2012 is the $US10 billion continued expansion of its Pilbara iron ore operation in Western Australia.

Rio’s Mount Pleasant coal project now looks the most likely to be shelved. The company was due to make a decision on whether to build the mine this year.

It would employ about 350 people and produce 10.5 million tonnes of thermal coal a year.

Mr Albanese is thought to have told investors that the huge spike in costs – including the Australian dollar, labour constraints, the carbon tax and construction inputs – is weighing on marginal developments.

Mr Albanese raised concerns with the government about the potential removal of the diesel rebate in the budget next Tuesday, which would mean an additional $500 million in annual costs for the company.

CLSA analyst Hayden Bairstow said it was not a great surprise that Mount Pleasant might be put on ice.

“The capital costs on projects like these has really shot up and I expect there has been a material increase from the last time Rio looked to approve this project,” he said.

Rio recently withdrew from the Abbot Point coal terminal due to cost pressures and regulatory constraints, raising doubts about its commitment to east coast coal expansion.

Rio’s board is tipped to approve the next $US10 billion-plus expansion of the Pilbara operations as early as this month.

The miner is looking to expand iron ore output to 353 million tonnes a year – up from the 283 million tonnes already approved.

Rio chairman Jan du Plessis said last month that Rio’s iron ore expansion options in the Pilbara were the most attractive in the world in terms of returns generated from capital employed.

Higher-margin iron ore projects are now being favoured by miners over coal.

The price for Newcastle thermal coal fell below $US100 a tonne this week, its lowest level since October 2010, as supplies flooded the Asian market while demand in China declined.

Iron ore prices have remained steady at $US150 a tonne, with steel demand strong despite fears of a slowdown in China, the world’s biggest consumer of the metal.

Outside iron ore, Rio’s Simandou project in Guinea is also due for approval this year while a second-stage development is also being looked at for the Oyu Tolgoi copper-gold project in Mongolia.

Investors are becoming increasingly anxious about mining companies overspending on capital at the expense of shareholder returns.

BHP Billiton is also re-evaluating some of its spending plans. BHP investors have raised concerns about the miner’s $US80 billion capital expenditure program – they are worried it will come at the expense of returning capital to shareholders.

The company is due to decide whether to proceed with the Olympic Dam project this year, along with the construction of an outer harbour at Port Hedland and a new potash mine in Canada.

In December 2010, Rio’s Coal & Allied received a mining lease from the NSW government for the Mount Pleasant project, which could produce 10.5 million tonnes of run-of-mine thermal coal starting in 2014.

The Mount Pleasant project is located adjacent to Rio’s Bengalla mine and four kilometres from the town of Muswellbrook in the NSW Hunter Valley. It would be an open-cut mine employing about 350 people, according to Rio Tinto Coal Australia’s website.

The deposit has reserves of 394 million tonnes of thermal coal.

Rio refused to comment last night.