Why Rio’s iron ore operations are the lowest cost producer

Why Rio’s iron ore operations are the lowest cost producer

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Nov. 26 2019, Updated 9:18 p.m. ET

Rio’s iron ore operations

Rio Tinto’s (RIO) iron ore product group is the second largest producer in the global seaborne market. Its major iron ore operations are located in Australia and Canada. It also has iron ore interests in India and Singapore.

Australia

  • HIsmelt – It’s the world’s first commercial direct smelting process. It produces premium quality pig iron directly from iron ore. Remember from our iron ore industry overview, without the direct smelting process, iron ore has to go through an additional step of sintering before it’s converted to pig iron. This leads to lower operating costs for steelmakers and lower pollution.
  • Pilbara – This is a high-grade iron ore area in western Australia. It includes an integrated network of 15 iron ore mines, three port facilities, a 1,700 kilometer rail network, and the related infrastructure. There are plans to expand the Pilbara operations from the current 250 million tons to 360 million tons by 2018. For Pilbara, Rio has offtake agreements with suppliers. For 2014, ~85% volumes will be sold under term contracts. The rest will be sold in the spot market.
  • Rio’s peer, BHP Billiton (BHP), also has significant operations in the Pilbara region. It’s planning to expand its operations to take advantage of the existing infrastructure. It also wants to reduce the costs per unit. BHP has other major iron ore assets in Brazil—in partnership with Vale SA (VALE).

There’s a major sales destination for Australian products is China.

Canada

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  • Iron Ore Company (or IOC) – It’s a leading iron ore concentrate and iron ore pellets producer in Canada. It has worldwide customers. The company operates a mine, a concentrator, a pelletizing plant, and a 418 kilometer railroad that links the mine to the port. The bulk of the production is sold to Japan and South Korea.

Cliffs Natural Resources (CLF) also owns iron ore interests in this region—eastern Canada. Currently, it’s looking for buyers for its assets.

The SPDR Metals and Mining (XME) invests in all the above mentioned stocks.

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