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A Look at Factors Driving Rio’s Energy and Minerals Division

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Energy and Minerals

Rio Tinto (RIO) restructured its divisions in 2016. While coal moved out of the copper division into minerals, diamonds were moved to copper.

Along with iron ore and manganese, metallurgical coal is a key input in steel production. A sustained rise or fall in coal shipments is a significant indicator that affects the stock value of coal producers (KOL) such as BHP Billiton (BHP) (BBL), Rio Tinto, Peabody Energy (BTU), Alliance Resource Partners (ARLP), Arch Coal (ACI), and Cloud Peak Energy (CLD).

Rio Tinto forms 1.7% of the SPDR S&P Natural Resources ETF (GNR).

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Demand dynamics

The market for titanium dioxide feedstock and uranium remained weak throughout 1H16 as the industry absorbed excess inventories. The uranium market has also been suffering from high inventory levels, which led to weaker prices during 1H16. Prices are still under pressure.

The market for zircon, on the other hand, has become stable after initial weakness in Chinese demand.

Demand for borates also remains stable given strong demand from the Americas and India, offset to an extent by weaker demand in China.

Thermal and hard coking coal prices in 1H16 fell to averages of $51 per ton and $84 per ton, respectively.

Segment’s performance

This segment’s earnings of $82 million were 11% higher year-over-year (or YoY) in 1H16. While prices were lower YoY, they were offset by cost improvements and weaker exchange rates.

The segment also generated free cash flow of $332 million in 1H16, $77 million lower than in 1H15 due to lower operating cash flow, partly offset by reduced capital expenditure and continued capital discipline.

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