Monsters of Rock: Rio says demand for its metals will rise 25% by 2035 thanks to the energy transition

Rio Tinto’s top economist says demand for its metals will increase 25% by 2035 on green energy transition
As it mulls investment decision at Simandou, Rio boss Jakob Stausholm says large scale M&A would be “really, really sad”
Miners take the ASX by storm amid China’s potential Covid windback

Rio Tinto (ASX:RIO) fronted investors in London yesterday in the latest step of its push to convince them the worst is behind the iron ore giant and the mining industry’s green shift will be long-term tailwind for the sector.

Coming the same week it announced an agreement to improve relations with the traditional owners whose cultural heritage was blown up in the Juukan Gorge tragedy, Rio’s top brass are painting a bright picture for the future, saying their analysis shows a 25% jump in demand on a copper equivalent basis for the commodities it peddles.

They include lithium (soon), copper (duh), mineral sands, aluminium, scandium and, of course, iron ore.

While previously the demands on major miners and the world in general to reduce emissions has been viewed as a handbrake on mining and exploration, whether through technology or just fantastic public and government relations, net zero is now viewed as a trampoline.

“Let’s not be under any illusion, governments will have to implement aggressive policies to induce the enormous investments in new technologies, recycling and primary commodity suppliers that will be needed to construct a carbon free economy,” Rio head of economics Vivek Tulpule said.

“We envisage emission penalties or alternatively, decarbonisation incentives, eventually well in excess of US$100 per tonne of CO2 if warming is to be kept below even two degrees.

Tulpule says encouraging the development of supplies of ‘critical and strategically important minerals will be an important part of policy frameworks’, like the US Government’s Inflation Reduction Act, which will incentivise supplies of critical minerals in the US and aligned nations like Australia.

Meanwhile, its chief scientist Nigel Steward said the idea of shipping hydrogen around the world as an energy carrier is not viable, posing questions for Australian governments and advocates like Fortescue Metals Group’s Andrew Forrest who wish to turn green hydrogen into a major export market.

“If we want to use hydrogen as an energy carrier, and we’re going to transport it around the world as liquid hydrogen, that’s problematic, because 1% of the hydrogen per day is lost to the atmosphere,” Steward said.

“Recent studies have shown that hydrogen actually has a global warming potential 5-16 times greater than CO2.

“So what this means is it’s better to burn natural gas than it is to transport hydrogen around the world and then consume it later and this is the reason why when we look at hydrogen, we’re going to produce it where we consume it.”

Steward also said it would take time to develop the tech to electrify haulage on its mine sites because the long charge times relative to battery power for heavy haulage vehicles posed a logistical challenge.

Love, love me Simandou

One aspect of the capital markets day seminar which seems clear is that Simandou remains a priority for Rio, even with plans to develop the 40Mtpa+ Rhodes Ridge mine in the Pilbara now on the agenda.

CFO Peter Cunningham said Rio plans to spend US$3b of growth capital annually over the next three years with its equity share of Simandou around 45% of the total.

However, he noted Rio still has to approve the investment and form the infrastructure JV with the Chinese-backed Winning Consortium and Guinean Government on the West African mega mine.

“If we cannot develop value accretive options, we will follow our capital allocation framework,” he said.

“Simandou is a clear example of this – it’s in our capital guidance, but it’s dependent on us reaching agreement to commit to the project with our JV partners, the government of Guinea and WCS on the infrastructure pathway.”

CEO Jakob Stausholm hinted M&A was not a major priority, warning in the context of Rio’s “significant transformation” large scale M&A “tends to completely derail what you’re doing”.

“I think that will be really, really sad for us if we embarked upon too large scale (an) acquisition,” he said.

“But I do think when I look back, all the deals we have done so far, in my view, have been super value accretive.
Small things like we bought 40% of Diavik (a diamond mine in Canada).

“It’s been super, super valuable. We were a bit lucky with the diamond price. We have sold things that we can’t add any value to like the what is it called, the Cortez gold stream, we’re not the right owner of that.

“The Rincon (lithium) project, of course it’s early days, but it looks like we are adding an awful lot and it fits perfectly into our strategy.”

So what did we actually find out about investing in Rio?

In the immediate term, Rio is seeing costs rise and production stagnate, not all that different from recent years, with CEO Stausholm admitting it had missed guidance three years in a row.

Iron ore guidance will remain unchanged in 2023 at 320-335Mt, with a medium term target of 345-360Mt, but inflationary pressure will send costs to a multi-year high of US$21-22.5/t, up from US$19.5-21/t in 2022, and copper costs will rise to US160-180c/lb from an already marked up 150-170c/lb in 2022.

A new investment, announced yesterday, will see Rio pump US$600 million ($882m) into two 100MW solar farms and 200MWh of on-grid battery storage in the Pilbara by 2026, on top of the 34MW solar farm at the new Gudai-Darri mine.

The first standalone farm has been approved, with 225,000 cyclone hardy solar panels to be installed from next year ahead of a 2025 commissioning date, with the whole project to carve out 300,000t of CO2 emissions equivalent to 10% of Rio’s iron ore emissions and reduce gas consumption costs by around US$55m.

It is among the early activities of a US$7.5b capex bill Rio expects to spend on decarbonisation to halve its Scope 1 and 2 emissions by 2030, which will include the installation of 1GW of renewables in the Pilbara to support plans to electrify its mine and rail fleet, expected to require up to 3GW of renewable capacity.

Rio’s iron ore boss Simon Trott told analysts in a Q & A session yesterday the renewable rollout would shave 15-20c of its unit costs, while acknowledging escalation was “above trend”.

He also thinks the development of the new high grade and large scale Rhodes Ridge mine as the cornerstone of its next phase of asset growth will help keep costs in check.

“Certainly escalation over the last few years across the industry as the chart showed has been above trend and so obviously, this year, you’ve seen energy prices, you’ve seen labour, you’ve seen some of those inflationary impacts,” Trott said.

“I guess what we’re really focused on is making sure that we’re driving productivity that we’re driving costs in the best way and we are breaking the trend line on some of those. So whilst work index increased at 12%, through this year, next year, we’re expecting about 5%.

“And as we work our way through that next tranche of mine developments that’ll flow through obviously, longer term Rhodes (Ridge) will enable us to completely reset the business as well and really position for the for the decades to come.”

What else is going on?

China’s apparent thawing of its increasingly antiquated and authoritarian approach to Covid-19 — it has resorted to censoring happy fans cheering maskless on the local broadcast of the FIFA World Cup in Qatar — is firing up markets.

Its hand seemingly forced by an emerging protest movement across major cities, Guangzhou appears to have eased Covid controls after the public demonstrations.

Base metals like copper, nickel, zinc and aluminium all surged higher with the Singapore iron ore contract briefly lifted 4% this morning before settling down to a 1.14% rise to US$100.90/t. Gold also lifted on hopes the pace of rate rises will slow in the US.

The materials sector climbed 2.56% as of 3.15pm AEDT, with South32 (ASX:S32) up 6.59%, Newcrest (ASX:NCM) rising 4.72%, IGO (ASX:IGO) 3.77% higher, Fortescue and Rio 2.79% and 3.39% stronger and Allkem (ASX:AKE) lifting 2.78%.

Mid-caps were also in fine form, with Evolution (ASX:EVN), Silver Lake (ASX:SLR), Bellevue Gold (ASX:BGL), Champion Iron (ASX:CIA) and West African (ASX:WAF) all up more than 5%.

Meanwhile, the festival of Rinehart concluded yesterday, with her main game Hancock Prospecting posting a $5.8 billion profit. That is, sadly for Gina and her children, $1.5b less than the record $7.3b Hancock pulled from Roy Hill, Atlas Iron and a bunch of energy, resources and agriculture investments last year.

It’s still mighty impressive for Australia’s most profitable private company in the context of falling iron ore prices.