Monsters of Rock: Rio Tinto's next evolution takes shape

Rio Tinto has completed its $10bn acquisition of Arcadium Lithium, becoming one of the world’s largest lithium producers overnight
It has also approved a US$1.8bn replacement mine in the Pilbara as it looks to revitalise its 330Mtpa iron ore business
Metals and Mining index falls but African gold stocks gained

Much like Pokémon, some miners seem to get worse after they evolve.

But evolve they must, as mines age, markets change and investors get antsy for better returns.

M&A is often a case of be careful what you which for, much like the heart-wrenching coming-of-age experience of seeing your cute, powerful Pikachu, kept in a state of delayed adolescence for too long, turn into a dawdling, emotionless Raichu.

Rio Tinto (ASX:RIO) shareholders have certainly come out on the wrong side of the company’s attempts to evolve in the past.

Its top of the market US$38bn takeover of aluminium producer Alcan has been roundly pilloried, the US$3.7bn acquisition of failed Mozambican coal miner Riversdale Resources even moreso, leading not only to a meagre US$50m sale but years locked in court over disclosure failings.

Investors will be hoping its return to M&A and growth initiatives will be a more successful evolutionary process.

That kickstarted this week with the closure of its $10 billion deal to acquire lithium producer Arcadium, a bottom-of-the-market gambit (lithium prices are, to quote one prominent executive, “in the toilet”) that will immediately make Rio one of the world’s top producers of the battery metal.

Rio is betting that the long-term demand growth outlook for the EV metal eventually wins out over supply pressures, which have depressed prices in the past two years as China has ramped up investments in output both at home and in Africa.

On top of the 75,000tpa LCE brine operations Rio has picked up in Argentina, Arcadium’s broader package of development ready sites in South America and Canada could deliver 170,000tpa by 2028.

But Rio’s big balance sheet could help the miner ramp that up to the 250,000tpa originally floated by Arcadium when it formed from the merger of Livent and Allkem. That’s not to mention Rio’s 60,000tpa Rincon DLE project in Argentina, approved last year at a capital outlay of US$2.5bn.

First production is expected in 2028, with full ramp up by 2031.

But wait, there’s more

Rio has other pressing engagements as the $161 billion mining giant, now in its 152nd year of existence, looks to future proof its business.

The world’s largest iron ore exporter wants to improve the quality of its product in the Pilbara, where grades have been on a downward slide as orebodies age.

Its latest initiative is a US$1.8bn investment to extend the life of the Brockman zone, where the Brockman 4 mine produced 43Mt last year.

Its Brockman Syncline 1 mine project, approved on Thursday, was a positive step, with approvals from the State and Federal Government delivered and its timeline brought forward from 2028 to 2027.

BS1 will have the capacity to process 34Mt of iron ore a year, and has been developed in consultation with the Puutu Kunti Kurrama and Pinikura and Muntulgura Guruma traditional owners.

The PKKP are a key stakeholder, having raised the alarm on the destruction of cultural heritage stretching back over 40,000 years in a blast at Juukan Gorge in 2020.

That incident brought with it a cultural reckoning for Rio and the broader mining industry, turfing out its then CEO JS Jacques and other key executives.

The Brockman development is part of a string of critical replacement mines Rio needs to get into gear over the next decade to preserve its spot at the top of the iron ore export ladder, with creeping costs that have expanded against those of main competitor BHP (ASX:BHP) also a concern.

“Brockman 4 produced 43 million tonnes of iron ore in 2024. Securing this project extends the life of the Brockman hub. This is good for our business, good for Western Australia and good for the Australian economy,” Rio iron ore CEO Simon Trott said.

“Rio Tinto has been mining iron ore in the Pilbara for almost six decades and our tranche of new mines will ensure we can continue to supply the globe’s ongoing need for iron ore, for decades to come.”

The first, Western Range, is more than 90% complete, with first production due in the first half of 2025. Sustaining projects at Hope Downs 1 – co-owned with Hancock Prospecting – and West Angelas are still going through the approvals process.

Collectively the mines are expected to produce 130Mtpa. That’s before the major Rhodes Ridge development, which is undergoing a PFS and due for delivery by 2030.

The 40Mtpa initial development comes with high grades that Rio thinks will help address quality issues in its sales mix, making the flagship Pilbara Blend again around 85% of its shipments.

That’s important given concerns over the future of the Chinese steel industry, with a timid 5% GDP growth target and muted support measures for its property sector.

“Although industrial metals prices have risen following the National People’s Congress (NPC) in China, we still think that prices will fall over 2025 and 2026 given that the policies outlined do not go far enough to address the structural headwinds facing China’s property sector and the wider economy,” Capital Economics climate and commodities economist Hamad Hussain said.

Lower grades of iron ore draw discounts from steelmakers, with the Simandou operation in Guinea, in which Rio has a big stake, also a concern for market watchers.

Once ramped up to 120Mtpa, Rio’s share of production from the high-grade African development is expected to clock in at around 27Mtpa.

But there are concerns it could lead to oversupply in the market if China’s steel sector continues to contract, with reports by Bloomberg suggesting crude steel output could be trimmed by 50Mt this year.

Singapore futures were fetching US$99.75/t this morning.

Rio Tinto generated US$16.2bn in EBITDA at its iron ore operations in 2024, down 19% on higher costs and weaker prices with production also down from 331.5Mt to 328Mt YoY, making up two-thirds of its earnings.

The ASX 300 Metals and Mining index fell 2.23% over the past week.

Which ASX 300 Resources stocks have impressed and depressed?

Making gains 🚀

West African Resources (ASX:WAF) (gold) +25.9%

Resolute Mining (ASX:RSG) (gold) +13.5%

Bellevue Gold (ASX:BGL) (gold) +8.4%

Spartan Resources (ASX:SPR) (gold) +7.4%

Eating losses 😭

IperionX (ASX:IPX) (titanium) -13.6%

Mineral Resources (ASX:MIN) (lithium/iron ore) -13.1%

Arafura Rare Earths (ASX:ARU) (rare earths) -10%

Chalice Mining (ASX:CHN) (PGEs) -9.8%

West African Resources led the pack in the resources space, despite a second big drop for the Metals and Mining index on the ASX, with the Burkina Faso gold producer reporting a US$246m profit after tax.

Mineral Resources copped a big hit, with Chris Ellison’s struggling lithium and iron ore miner copping a credit downgrade from Fitch Ratings. Its BB- rating and negative outlook brings Fitch into line with MinRes’ Moody’s rating of Ba3, which has been unchanged since initiation in 2019, the company noted.

“MinRes has a covenant-light capital structure and significant liquidity, as well a clear path to deleverage the balance sheet through earnings growth,” MinRes said in a statement. “As Onslow Iron ramps up to nameplate capacity in early FY26, the low-cost project will generate significant cash flow for our Iron Ore and Mining Services divisions.”