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Is Rio Tinto Finding a Silver Lining in This Project?

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Silvergrass project

On August 2, 2016, Rio Tinto (RIO) announced the approval of the development of its Silvergrass mine to maintain its Pilbara blend. The company said that it would invest $338 million to develop the mine. This capital expenditure (capex) was in line with its management’s earlier guidance of less than $500 million.

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Project dynamics

This project is located adjacent to Rio’s Nammuldi mine. It will add 10 million tons of capacity. It will also lower the mine’s operating expenses by replacing road haulage with a 9-kilometer conveyor system that links its Silvergrass operations to its existing processing plant at Nammuldi.

The project will also involve a new primary crusher, which will be instrumental in providing high-quality, low-cost tons to the Pilbara blend, helping to maintain its premium quality and margin. The first production is expected by 4Q17. It will have an internal rate of return of more than 100% with a payback of less than three years.

Company’s take

Rio’s CEO said, “We are committed to disciplined capital allocation and the approval of the final phase of the Silvergrass development, which is one of the most value-accretive projects across the mining industry, delivers high-quality, low-cost growth that will underpin future returns to shareholders.”

The company also added during a conference call that these projects are among the very few being undertaken in the industry today. Rio has approved two other projects: the Amrun bauxite project and the Oyu Tolgoi underground project.

These projects are high quality and low cost, which gives operators of these assets an edge over miners with high-cost assets.

An increasing focus on high-quality assets has led miners (XME) such as Anglo American (AAUKY) and Glencore (GLNCY) to drastically restructure their portfolios. BHP Billiton’s (BHP) (BBL) assets are also high quality.

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