uploads/2016/02/Coal-Copper1.png

How Rio Continues to Manage Copper and Coal for Profitability

By

Updated

Copper and coal

Copper and coal prices hit multiyear lows in 2015. Improvements in cost structure help miners lower their costs of doing business, which is vital in a depressed commodity price environment. Miners such as BHP Billiton (BHP)(BBL), Freeport-McMoRan (FCX), Teck Resources (TCK), and Peabody Energy (BTU) are leaving no stone unturned to further optimize their cost structures. In this article, we’ll have a look at Rio Tinto’s (RIO) cost performance and realized prices for this division. BHP and RIO form 6.7% of the SPDR S&P Natural Resources ETF (GNR).

Article continues below advertisement

Copper segment

  • Lower prices affected the coal and copper businesses. The average copper prices were down 20% year-over-year (or YoY) to $249 cents per pound.
  • These price declines affected the copper and coal division’s underlying earnings negatively by $274 million, or 67%, YoY.
  • Despite lower prices, all of RIO’s coal and copper operations were free cash flow (or FCF) positive during 2015 and contributed $1 billion to the group. FCF for 2014 from these divisions was close to $0.9 billion.
  • The copper and coal segment has achieved around $1.9 billion in cost reductions since the program started back in 2013.

Coal segment

  • RIO’s Australian coal mines are among the lowest-cost in the industry and are still generating positive free cash flows.
  • The mines continue to run both coal and uranium businesses for cash. Management said that they remain very focused on market opportunities, improving prices, for example, through the Hunter Valley blend.

During the call, management mentioned that after exiting the Bengalla and Mount Pleasant project, RIO has best-in-class thermal coal assets in Australia. The company will continue to manage these assets for cash and profitability.

Advertisement

More From Market Realist