Rio Tinto Group (RIO), the world’s second- biggest mining company, said there may be opportunities for mergers and acquisitions in iron ore as the European debt crisis increases funding constraints on many projects.
“It is a process of continually analyzing and assessing market opportunities,” Sam Walsh, chief executive officer for iron ore at London-based Rio, said today in an interview with Bloomberg Television. “There may well be some opportunities.”
The “massive” industry consolidation in mining is set to continue, driven by low valuations, BlackRock Inc., which manages $36 billion in natural resources funds, said last month. Rio, which has made an offer of about C$654 million ($628 million) for Hathor Exploration Ltd., joins bigger rival BHP Billiton Ltd. in saying it will study acquisitions as the MSCI All-Country World Index of equities dropped 15 percent this year.
“The collapse in equity markets has led to a large disconnect between intrinsic values, stock prices and replacement costs,” Royal Bank of Scotland Group Plc analysts led by Lyndon Fagan said in a report. “With many miners cashed up and looking to grow, M&A looks to be a key theme through 2012.”
Rio rose 2.1 percent to close at A$63.27 in Sydney. The stock has dropped 26 percent this year.
There has been $127 billion of deals announced in mining this year, led by Alpha Natural Resources Inc.’s $7.1 billion purchase of Massey Energy Co., according to data compiled by Bloomberg. That compares with $113 billion last year. European stocks posted their biggest weekly drop in two months last week as lawmakers failed to agree on how to contain the euro area’s debt crisis and Italy’s and Spain’s borrowing costs jumped.
“It’s possible that assets that are normally not available, may come on to the market during such times,” Chief Financial Officer Guy Elliott said on an investor day webcast. “Rio Tinto should be in position to take advantage of many such opportunities, subject as always to quality and value.”
Rio had a strong balance sheet with estimated net debt of $7.9 billion, about $10.3 billion cash on hand and a undrawn standby credit facility of $6 billion, Elliott said.
Last week, OAO Magnitogorsk Iron & Steel agreed to buy Flinders Mines Ltd. for about A$554 million ($545 million) in cash, giving the Russian steelmaker control of a proposed iron ore project in Australia, while Mitsubishi Corp. agreed to pay Murchison Metals Ltd. A$325 million in cash for stakes in two ventures, giving Japan’s largest trader control of an iron ore mine and a rail and port project in Australia.
Rio expects to increase capital spending 17 percent next year and raised its iron ore expansion target to meet demand from China. The company plans at least $14 billion of spending on developing projects in 2012, Rio said today in a webcast presentation. This figure may rise on further approvals, it said.
“Rio Tinto continues to be well positioned in current markets,” Chief Executive Officer Tom Albanese said in a statement. “Our cash flow generation remains high and we are selling everything we produce.”
The company boosted its production expansion capacity target for its Australian iron ore operations by 20 million metric tons a year to 353 million tons by the first half of 2015. There are options to increase that to 453 million tons, it said. Iron ore usage in China, the biggest buyer, will double by 2020 from 2008, according to Rio, the world’s second-biggest exporter.
“Over the long-term I expect that as additional capacity is brought on in the industry, I expect prices will reduce,” Walsh said in the interview. “But the $60,000 question is when is that likely to happen?”
Rio had expected prices to start dropping from 2013, though because of the European debt crisis, Walsh said this has been pushed back to 2014, 2015. Iron ore for immediate delivery fell 70 cents, or 0.5 percent, to $140.40 a metric ton on Nov. 25, according to a price index compiled by The Steel Index Ltd.
Iron ore supply needs to grow by 100 million tons a year for each of the next eight years to meet demand, Rio said. The company expects to supply about 25 percent of this growth.
The short-term outlook for aluminum “remains challenging” as the industry faces higher costs and lower metal prices, Rio said. At current prices, Rio’s Alcan unit is expected to about break-even in underlying earnings in the second-half of 2011. It’s aiming to boost the unit’s earnings before interest, tax, depreciation and amortization by more than $1 billion, it said.
The company is likely to book some one-time charges in its aluminum and diamond divisions, CFO Elliott said.
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