Rio Tinto Hard-Pressed to Win by a Landslide


While shares of copper miner Rio Tinto have shown some resilience in recent weeks as they bounced 30% higher from their lows, reports of a second landslide at its Bingham Canyon copper mine may not send them back down again.

Earlier this year, the miner was crushed when a massive and catastrophic landslide at its Bingham Canyon mine in Utah caused 165 million tons of rock to crash to the mine floor. The project, which is operated by Kennecott Utah Copper, is the world's biggest copper mine, supplying about 1% of the global supply, and 17% of U.S. production, but also about 16% of total U.S. silver production, and 5% of its gold.

Source: Kennecott Utah Copper, Facebook

The fallout from the landslide was equally devastating. While no one was injured in the wall collapse, work at the mine was suspended -- and probably will be for years -- production estimates were halved, employees were laid off, management at the mine operator was shaken up, and even local tax revenues were impaired.

But Rio Tinto has begun the process of reclamation at the site, though it will be a long, difficult slog. So the landslide that was reported yesterday -- only about 100 yards wide and shifting some four to five feet -- brought a halt again to the work that was going on, and caused the evacuation of some 100 workers from the site.

Even so, because Bingham Canyon is a lost cause for the moment, it's been factored by the market into Rio Tinto's stock valuation, and shouldn't create any new stress on its shares. It was unsurprising that the miner's first half results for 2013 were so weak, with earnings falling 18%, and revenues dropping to $24.5 billion from $25.3 billion the year before.

No, Bingham Canyon isn't a problem, but there are other issues that should cause investors to pause before putting their money in. Rio Tinto's far-flung operations are running into government resistance as they seek to take a larger piece of the natural resources pie -- and the profits they can generate -- for its own use. The miner is struggling to come to an agreement with the Mongolian government over its Oyu Tolgoi project, and has been forced to halt development of the underground portion of the mine, where some 80% of the mine's value is estimated to reside.

It's not alone in battling the resource nationalism that's gripped countries as commodity prices soared. Barrick Gold is duking it out with Chile over its Pascua-Lama gold mine and the rights of indigenous tribes, and Kinross Gold was forced to abandon its Fruta del Norte gold mine in Ecuador after the government wanted to tax all profits above a base amount at a confiscatory rate of 70%.

The stalemates are leading to delays in the governments issuing permits to get the work going, a situation Vale can relate to. Its operations in Brazil grounded to a crawl at its Mariana project earlier this year after the permits needed to expand were delayed. Although it subsequently received approval to produce 20-million metric tons of iron ore a year, Vale suffered a 5% drop in production because of the delay.

The recovery in Rio Tinto's shares, while certainly a welcome relief to investors, may not see them grow much further, even ignoring the latest setback at Bingham Canyon. Mining's a tough sector to invest in right now, and it would pay to be choosy when you decide to place your bets. I just wouldn't choose Rio Tinto at the moment.

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