Major iron ore producers are awash in a
sea of cash, and are likely to remain so despite a recent retreat in the price
of the steel raw material. Where they diverge is what they think will be the
next big drivers of profit.
Rio Tinto, the world’s biggest iron ore
miner, posted record first-half profits on July 28, with underlying earnings
almost tripling to $12.17 billion from the same period a year earlier.
The surging profits were largely built on
the back of the rise in iron ore prices to record highs, despite Rio shipping
12% less iron ore in the second quarter, compared to the same period a year
earlier, as storms affected its Western Australia state operations.
RIO IS STILL INVESTING IN COPPER, BUT THE
MINER ALSO RECENTLY APPROVED A SIGNIFICANT INVESTMENT IN LITHIUM
Australia’s second- and third-ranked iron
ore miners, BHP Group and Fortescue Metals Group, have yet to report quarterly
financial results, but are likely to join Rio in reporting record profits.
BHP reported record full-year iron ore
production for the 12 months to end June, although output in the fourth quarter
dipped slightly, while Fortescue beat its full-year estimate for iron ore
shipments on the back of a record fourth quarter performance.
The spot price of iron ore for delivery
to north China , as assessed by commodity price reporting agency Argus, slumped
at the end of last week, dropping to $180.15 a tonne, down 10.5% from a week
earlier.
However, it’s worth noting that iron ore
is still at extremely high prices by historical standards, having traded below
$100 a tonne from mid-May 2014 to June 2020, with only a brief spike above that
level in May to August of 2019.
If China, buyer of about 70% of global
seaborne iron ore, does continue to cajole steel makers to limit production,
and supply continues to rise from top exporter Australia and number two Brazil,
it’s possible that prices will further moderate.
However, with Rio reporting a cash cost
of $18-18.50 a tonne for free-on-board iron ore at its Western Australia ports,
it’s clear the major miners are going to be strong cash generators even if iron
ore post further losses.
Different paths
What the miners are doing with all that
cash reveals much of where they are thinking they will be able to harvest
profits once iron ore demand inevitably declines over time, as China’s
industrialisation eases and the country also sources more ore from new projects
being developed, such as Simandou in the African nation of Guinea.
Rio is still investing in copper, with
expansion underway at its troubled Oyu Tolgoi mine in Mongolia, but the miner
also recently approved a significant investment in lithium, a key metal for
batteries that will be pivotal in any successful energy transition from fossil
fuels.
The London-based miner said on July 27 it
will invest $2.4 billion to develop its Jadar lithium project in Serbia, with a
four-year construction programme slated to start next year.
The mine will make Rio the largest
lithium supplier in Europe, and will give the continent’s major carmakers such
as Volkswagen and BMW another source of the metal that is vital to plans to
switch their vehicles to run on electricity.
Fortescue is also seeing a future in new
energies, but is backing hydrogen as a future winner.
The miner has in recent months entered
into a range of agreements aimed at exploring hydrogen projects in India,
Brazil, Africa and Tasmania, Australia’s island state.
The common thread is that Fortescue is
looking at ways of producing green hydrogen, mainly through using hydropower,
and then using the resultant hydrogen as a fuel in industrial processes,
including making steel.
BHP, which includes substantial investments in coking
coal used to make steel and oil within its portfolio, is taking a somewhat
different path to its Australian peers, with its major pending investment being
in potash.
The board of the world’s biggest listed miner is
expected to make a decision within a few months on whether to proceed with the
$5.7 billion project in Canada’s Saskatchewan province to produce the
agricultural fertiliser.
Potash is a key element in plant nutrition and can
make crops more drought resistant, something that is likely to become
increasingly important if climate change does alter rainfall patterns across
the world.
It could be argued that BHP’s planned foray into
potash is part of a response to climate change.
However, instead of trying to lower carbon emissions
as Rio is doing with lithium for batteries and Fortescue with green hydrogen,
BHP is seeking a product that will be in higher demand as the world deals with
the impact of climate change.
Disclosure:
At the time of publication Clyde Russell owned shares in Rio Tinto, BHP Group
and Fortescue Metals Group as an investor in a fund.
Mining.com