Rio Tinto has been quoted extensively in the Murdoch press about how committed they are to their energy business, and how they see coal as the bedrock of the world’s energy system for decades to come.
As we mentioned in our IEEFA briefing note, Rio Tinto is no longer really a diversified mining and energy conglomerate. It is now more than ever a giant iron ore mining company. Rio Tinto’s Energy Group generated a loss in 2013. It will represent less than 1% of Rio Tinto’s earnings before interest and tax in 2014, 2015 and 2016 – on consensus forecasts.
Rio Tinto says they see a bright future for thermal coal. But eight months ago Rio Tinto sold its 50% stake in the 10Mtpa Clermont Queensland thermal coal mine for US$1.05bn to Glencore and Sumitomo Corporation. That reduces Rio Tinto’s Australian thermal coal production by some 20%. It reduces Rio’s total coal global production by 15%.
Rio Tinto also spend US$4bn buying Riversdale Mining in 2011. Riversdale owns a 65% stake in some coal deposits in Mozambique, but constant issues over civil unrest against coal mining and Rio not playing the game with the local politicians has meant their US$4bn coal mine is producing only 0.4Mtpa of thermal coal. US$4bn for 0.4Mtpa of coal production?
The most expensive coal mine in world history. Hence Rio Tinto has written off $3bn of their investment. Now they are reported in the press as trying to sell their failed Mozambique foray to Coal India Ltd. As an aside, this makes sense. Rio wants to remove all evidence of this total investment failure – so selling off the written-down asset will allow them to forget and move on.
Coal India Ltd on the other hand has been scouring the world for global coal assets to acquire for five years. Coal India has US$10bn net cash waiting to be invested. Coal India’s only move internationally in five years was to buy some coal deposits in Mozambique. Unlike Rio, they paid very little for these deposits. Just as well, they have gone no where.
At some point if the seaborne coal markets ever recover, Mozambique could be a major global coal exporting nation in competition with Australia. Coal India is the logical buyer of this coal – India is geographically close, and India will be importing coal for decades to come.
So, Rio will take another write-down and quietly exit this investment at close to zero value.
Meanwhile, Rio Tinto’s other energy asset is the 68% owned ERA uranium business in the Northern Territory. ERA was Australia’s #1 producer of uranium for the last three decades. They suffered a major mining screw-up in Dec’2013 and have now closed the entire open cut mine down – permanently. So as of 2014, Rio Tinto is producing no uranium at all (ERA continues to process its remaining stockpiles).
Rio Tinto – the iron ore company. Life beyond coal.
Tim Buckley – Director Australasia, Institute of Energy Economics and Financial Analysis.