Ground Breakers: Rio gives green light to US$2bn iron ore development with China in the passenger’s seat
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China’s largest steelmaker Baowu has put its heft behind a second new iron ore development in under a month, joining Rio Tinto (ASX:RIO) in approving the US$2 billion Western Range iron ore mine.
The 25Mtpa mine will deliver ore to keep Rio’s Paraburdoo hub humming.
It currently consists of the Paraburdoo, Channar and Eastern Range mines, but after almost a decade of underinvestment Rio is having to fire up new operations to support sales of its main Pilbara Blend fines product and maintain its iron ore grade.
Rio’s ageing mine fleet and operational issues has seen it struggle to keep up with its ambitious iron ore export guidance in recent years.
It is hoped a new wave of developments can provide a platform for Rio to extend its iron ore output after years of stagnation at the world’s second largest miner.
Rio plans to ship 315-335Mt of iron ore in 2022, but delivered just 151.4Mt through the first half of the year, leaving it exposed to another potential miss this year.
That task was made tougher over the weekend after a derailment blocked the passage of ore from its new 43Mtpa Gudai-Darri mine.
As to the Western Range deal, construction will start next year on the JV, 54% owned by Rio Tinto and 46% owned by Baowu, which is also one of the key parties in a JV over the new 35Mtpa, $3 billion Onslow iron ore developed approved by Mineral Resources (ASX:MIN) last month.
Construction will start in early 2023, with first production expected in 2025, supporting 1600 construction jobs and 800 ongoing jobs to be filled by workers transitioning from other sites around Paraburdoo.
Baowu will also enter into an iron ore sales agreement covering 126.5Mt of iron ore over 13 years, representing its share of production over the life of the JV.
While much has been made of China’s plans to diversify away from Australian iron ore through domestic production, scrap steel purchases and developing its own mines in places like Africa (where Chinese interests are already partnered with Rio Tinto at the Simandou mine in Guinea) the relationship between the major trading partners remains strong despite diplomatic tensions between the countries.
In fact, the vast bulk of China’s investment in operating overseas iron ore assets is in Australia itself. Baowu and Rio have been in partnership at Paraburdoo since 2002 when they inked a JV deal over the Eastern Range deposits up to a production cap of 200Mt.
The deal will help Rio maintain its production of Pilbara Blend fines, having been forced to include more lower grade SP10 product in recent years to make up lower tonnes of what is the main product on which benchmark 62% iron ore prices are assessed.
“This is a very significant milestone for both Rio Tinto and Baowu, our largest customer globally. We have enjoyed a strong working relationship with Baowu for more than four decades, shipping more than 200 million tonnes of iron ore under our original joint venture, and we are looking forward to extending our partnership at Western Range,” Rio’s iron ore chief Simon Trott said.
“The development of Western Range represents the commencement of the next significant phase of investment in our iron ore business, helping underpin future production of the Pilbara Blend, the market benchmark.
“At the same time, Rio Tinto and Baowu continue to work together on low-carbon steelmaking research, exploring new methods to reduce carbon emissions and improve environmental performance across the steel value chain.”
The mine is the first to be approved by Rio after the Juukan Gorge debacle, which saw three senior executives including CEO JS Jacques and iron ore chief Chris Salisbury given their marching orders after the company blasted a rock cave in the Pilbara containing artefacts of the local PKKP Aboriginal people dating back over 40,000 years.
Rio announced a first of its kind agreement earlier this year with the Yinhawangka Aboriginal Corporation, which will includ the Yinhawangka people in decision making on environmental matters and mine planning.
The Baowu transaction, meanwhile, will be subject to approvals from Rio Tinto shareholders, the Australian and WA Governments and Chinese regulatory authorities.
Having fallen below US$100/t in recent weeks on negative sentiment around China’s property market, iron ore has been stabilised in recent days amid word of an uptick in steel production in the Middle Kingdom.
After a mini-run to start the week, lifting above US$104/t, Singapore futures were down 3% this morning to a tick over US$100/t as markets nosedived on higher than expected US inflation numbers that set the stage for a third straight 75 point rate rise.
The ASX is down 2.58% today following carnage in the US, with mining and energy stocks no exception, those sectors cratering 1.87% and 1.7% respectively.
Just one mining company ranked mid-cap or above was in the green, with 29Metals (ASX:29M) shares lifting a stoic 0.47%.
The $1 billion copper miner, which made adjusted NPAT of $7 million in the first half of 2022, is down around 33% year to date.
Other stocks faltered as fears of a fretful Fed saw gold, copper and nickel all fall by more than 1%, with the precious metal tumbling to a touch over US$1700/oz overnight.
Rate rises and a stronger US dollar tend to be bad for commodities as investors shift to cash.