Rio Tinto (RIO) shares will come under pressure today on the ASX after news emerged overnight that the miner will close one of its major WA iron ore mines over Christmas in an apparent cost-cutting exercise that doesn’t stand up to scrutiny.
The news emerged in London last night where Rio shares sold off on the news and the softening of the post US election boomlet and ended 4.5% lower.
That gives us a guide to the sort of weakness we might see on the ASX this morning. Rio shares ended down 0.8% in Australia yesterday at $58.95.
In an email to the 440 staff at the huge Hope Downs mine in the Pilbara yesterday, Rio management said there would be a two week closure over Christmas New Year which will help “reduce operating costs and maximise cash to strengthen the business” in expectation of a tough 2017.
Analysts point out the absurdity of this comment because the outlook for iron ore was much worse this time a year ago with the global price heading towards $US40 a tonne.
It bottomed out at $US39.60 on December 15, 2015 and the outlook was for the price to remain low well into 2016 (that was before the Chinese government started a quiet stimulus of the economy aimed to sparking a rebound in housing, and started curbs on steel making and coal mining over production).
Twelve months the iron ore price has been far more resilient than in 2015. Yesterday it was above $US72 a tonne, having reached this level earlier in the year, only to fall sharply by 30% and more, then rebound as the rebound in China accelerated from mid-year onwards, taking coal and iron ore prices with it.
And while the outlook for iron ore remains tough, it is not as grim as a year ago and all companies, not just Rio are continuing to cut costs. They all are. Rio’s explanation to cut costs requires a two week shutdown of this huge mine doesn’t hold water.
Some analysts wonder that if there is another issue, mining and transport problems at Rio’s WA mines – besides the hair-brained WA tax idea. Rio has already sliced its 2016 iron ore production guidance because of mining and transport delays, especially the AutoHaul system in the Pilbara railroads of Rio Tinto.
At the start of the year Rio estimated its global iron ore production would be around 350 million tonnes. That is now put in a range of 325 to 330 million tonnes. The reduction has been due to a combination of weather, mine, rail and port maintenance and delays and those problems with the AutoHaul system in particular.
The real target seems to be the tax increase proposed by the National Party, the junior coalition partner in WA coalition government. Chris Salisbury, chief executive of Rio’s iron ore division, was quoted in the email as saying “There couldn’t be a worse time to tax our business an extra A$1.5bn every year. This will destroy jobs, hurt local businesses and damage Western Australia’s international competitiveness.”
The National Party has proposed increasing a production rental fee charged to Rio and BHP on their Pilbara operations from 25 cents to $5 per tonne. The same National Party was at the forefront of the campaign against the Rudd – Gillard government’s mining tax. High profile WA miners, Gina Rinehart or Twiggy Forrest were also notable in opposing the mining tax getting on trucks in WA at anti tax rallies. So far in this dispute, both have been very low key.
