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Is the ‘Tipping Point’ for Miners Near?

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What’s the tipping point?

While the broader commodity market (XME) is very depressed, miners are taking drastic measures to stay afloat. Still, the assets available for sale in the market have high asking prices. Rio Tinto’s (RIO) CEO (chief executive officer) Sam Walsh said, “I expect we need a bit more pain.” He added, “A minor interest adjustment could actually be a tipping point for some people.”

Walsh clarified that it’ll be the tipping point for miners with relatively high debt and that it’s “not a problem that we face.”

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Will Rio acquire assets?

Walsh thinks that higher interest rates might push the owners of some of the projects to put them up for sale. He said that Rio would be interested in only tier-1 copper projects if they’re offered at a reasonable price. In this context, he mentioned that Rio has a lot of internal growth projects that have a high return potential.

Internal growth projects

Following are the three key growth projects Walsh highlighted:

  • South of Embley – Rio has already approved this $1.9 billion bauxite project in north Queensland. This will help the company offset the decline from the depleting East Weipa mine. It falls in the first quartile of the industry cost curve.
  • Oyu Tolgoi – This is an underground copper project in Mongolia. Rio-controlled Turquoise Hill Resources (TRQ) owns 66% of this project. On December 15, 2015, Rio announced the locking in of a $4.4 billion financing package for funding this mine. The final decision to proceed on the project will be made in the first half of 2016. According to Rio’s copper and coal chief executive, “Long-term copper fundamentals remain strong and Oyu Tolgoi as a tier one asset will be a globally important source of supply as the market moves back into structural deficit over the next few years.”
  • Silver Grass – This is an iron ore project in Western Australia aimed at maintaining the high grade for iron ore. It’s also a must in order for the company to reach its ultimate expansion target of 360 million tons per year.

These projects are high-quality and low-cost, which give operators of these assets an edge over the miners with high-cost assets. This increasing focus on high-quality assets led miners such as Anglo American (AAUKY) and Glencore (GLNCY) to restructure their portfolios drastically. BHP Billiton’s (BHP) (BBL) assets are also high-quality.

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