IOC in trouble??Rio Tinto’s iron ore expansions put IOC at risk of closure
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Matt Chambers
Resources Reporter
Melbourne
Rio Tinto’s Australian iron ore expansions that are weighing on prices and closing down higher cost production are putting the company’s higher-cost Canadian operations at risk of closure.
Rio’s 58.7 per cent-owned Iron Ore Company of Canada mine and plant in Newfoundland made a $US1 million ($1.36m) net loss in Rio’s half-year accounts last Thursday, as lower iron ore prices slashed what had been a (still small by Rio standards) $US97m profit a year earlier.
Managing director Sam Walsh and chief financial officer Chris Lynch have both told analysts the Canadian operations could be at risk if productivity plans are not successful.
Prices of iron ore are falling as Rio and BHP Billiton threaten more production from Western Australia; what’s more, Chinese demand is faltering and Vale is set to bring on more from Brazil.
Canadian analysts say IOC is losing money at current iron ore prices, but Rio has told London analysts the operation, through which Rio earned $US80m of first-half earnings before interest, tax, depreciation and amortisation (down from $US318m a year earlier), was making cash.
UBS yesterday reported that Mr Walsh had told a London analysts’ roundtable that every operation in Rio must make cash or have a plan for recovery.
“Management will close Iron Ore of Canada if it becomes cashflow negative,” UBS said, noting Mr Walsh stressed the operations were cashflow positive for now.
According to Citi analyst Clarke Wilkins, who met with finance director Chris Lynch in a Sydney analyst roundtable, IOC was given until the end of next year to turn itself around.
“But without more consistent production and lower costs, (it) is one of the third and fourth quartile iron ore producers at risk as low-cost capacity is expanded,” Mr Wilkins.
On Rio’s earnings webcast on Thursday night, Mr Walsh sidestepped a question on whether he saw a situation where IOC could be closed. “We’re seeing a strong focus on improving that business in terms of its cost, in terms of its throughput,” Mr Walsh said. “Kelly Sanders, the president of that operation, has actually moved his headquarters from Montreal up to Labrador City (where the operations are), so he can physically be on the ground and physically ensure that we’re taking every step possible to optimise that business.”
Analysts at Raymond James, in Canada, estimate the company will receive an average price of $US62.50 a tonne this year, while “all-in” costs will be $US68.50.
“With the fall in iron ore prices, we estimate that IOC’s costs are above its sales, resulting in a cash drain on the company,” the analysts said last month.
“We believe there is a risk that IOC may close if its costs and productivity do not improve.”