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Rio Tinto shines a light on a steadier future for miners

Published: 22:20 03 Aug 2016 AEST

Bjorkdal
Rio has now dug its way out of the troubles of the past

Will junior iron ore miners pick up now that the iron ore price appears to have found a level nearly US$20 above its January lows?

Iron ore has always been a tough game for juniors because of the huge infrastructure costs involved in development, but if the price gets high enough anything’s possible.

Back in 2008, certainly, it did indeed look as though anything was possible – the iron ore price was firm at over US$120 per tonne and the junior iron ore developers proliferated.

Eight years and one financial crisis later, producers now cheer a price of over US$60 and major producers have yet to make up the shareholder value that was lost between then and now.   

Rio Tinto (LON:RIO) is a case in point. In 2008 Rio’s share price was two thirds higher than it is now and it was all systems go on the back of a Chinese-led boom in demand.

Its annual report and accounts for 2007, released in March 2008, spoke of “solid global economic growth,” led by China. “We expect,” said the company’s then chairman, “strong increases in demand for most metals and minerals during 2008 and 2009.”

It was not to be. Instead, having rejected a take-out from BHP Billiton (LON:BLT) at near-record highs, Rio Tinto headed off towards write-downs of more than US$20bn and years of shareholder angst.

Given all that, it’s perhaps moot how much expertise Rio Tinto really brings to the market commentary it presents in conjunction with its financial results.

But weighing against that doubt there’s no question that of all corporate entities three are plugged in like no others to the global iron ore market. One is Rio; the other two are Vale (NYSE:VALE) and BHP Billiton.

And Rio’s commentary in its interim results for the six months to June are replete with insight into how it’s looking at the world and where it thinks it’s going.

First off, it’s full of words like “caution”, “constrained”, “slow”, “fragile”, and “headwinds,” as all such documents have been since Rio finally faced up to the new world order in 2009.

There was the odd smattering of “cautious” commentary before the financial crisis too, but the clear impression was that this was because Rio didn’t want to appear too cocky rather than because it was sounding any kind of genuine warning.

These days it’s different. China is no longer taken for granted. Deeper analysis into Chinese property markets is offered, with differentiation between types of cities and the observation this time round that the pick-up in Chinese construction activity which has pulled up the iron ore price lately “has not been broad-based.”

The Rio analysis sets Chinese economic growth firmly in context as leveraged to what it calls “slow global trade growth.”

China is no longer a story of miracle growth set outside of any other context. It’s come in and joined the rest of the world. That’s good for the Rio analysis, and it marks a more general step forward in the global economy. Think back: fifteen years ago most investors would have been hard put to name a single Chinese company. Now, they are legion, from Alibaba to Jinchuan, to Lenovo.

This change, which in retrospect now seems inevitable, means that junior miners will no longer be able to promote themselves on the mystical power of Chinese growth alone.

If the “Supercycle” means global growth at 3% then so be it, but there’s nothing magical about it. Thus Rio Tinto speaks of global growth forecasts for 2016 immediately after it concludes its analysis of the Chinese industrial and manufacturing sectors.

So, flights to China for unspecified business purposes can no longer be infused with the same promotional power that the chairman of Beowulf Mining once gave them in days of yore. And loose talk of Chinese infrastructure companies booking out hotel floors in Central African capitals will no longer mean share price rises for the likes of the now defunct Afferro Mining.

No, the world is getting serious again about mining in its commentary and its expectations. It’s perhaps that development which has driven a generalist return to the sector after a long absence. But no-one’s expecting miracles, and any bonanza for junior miners looks still to be several years away.

 

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