Rio Tinto plc's Steely Nerves


Like the Agatha Christie novel And Then There Were None, iron ore miner Rio Tinto is similarly seeing interest in its Canadian iron ore assets die off one by one. The latest potential buyer, China's Wuhan Iron & Steel, said last week it, too, is no longer interested in bidding on Rio's 59% stake in Iron Ore Co. of Canada, which was said at one time was being offered for as much as $3.7 billion.

Source: Iron Ore Co. of Canada.

Wuhan joins the list of possible suitors that have fallen by the wayside, including fellow miners Teck Resources and Glencore Xstrata, private equity firm Blackstone, and government-owned metals trader China Minmetals.

Where Teck has maintained its interest in the assets were always "grossly overblown," the Chinese connection was seen as among Rio's best opportunities to unload the iron ore company. Producers look to China as their biggest customers since the country produces about as much steel as all the rest of the world combined, and its record-setting production and imports last year largely helped offset the weakness exhibited by Europe and other countries.

According to the World Steel Association, China's crude steel production jumped 7.5% in 2013, or twice the rate of growth the rest of the world achieved. At 780 million tons, China's steel production accounted for 48% of the total 1.6 billion tonnes produced globally in 2013, and was a record once again for the fourth straight year.

However, production in 2014 is expected to fall along with prices. Already pricing is at six month lows and production is only expected to grow by 3.1%, or less than half its rate last year. Inventories remain high with stockpiles at Chinese ports hovering above 80 million tonnes since mid-November, a significant level because it represents about 80% of monthly consumption.

While the iron ore industry is not all a tale of woe, it underscores why Rio Tinto is having a tough time finding a buyer for the price it wants. The miner, though, has shown a propensity for toughing it out and not selling at fire-sale prices, withdrawing from the market its diamond mine after a buyer failed to materialize, and subsequently saying that unloading its Australian aluminum assets in the current climate was not feasible. It then closed its Gove refinery.

The Iron Ore Company of Canada, or IOC, is Canada's largest iron ore producer and a leading global supplier of iron ore pellets and concentrate, producing 9 million tonnes in 2013 with sales 46% higher than the year before. And according to the company's most recent production report, it expects to bring concentrate production capacity up to 23.3 million tonnes per year during the first six months of 2014.

Deep water port in Sept-IIes. Source: Iron Ore Co. of Canada.

Rio Tinto CEO Sam Walsh told investors a year ago it would cut costs by over $5 billion by the end of 2014 by divesting non-core assets, and while it's unloaded billions of dollars worth so far, IOC may be a tougher nut to crack because of its complex ownership structure that's split between it, Mitsubishi (a 26% ownership stake), and Labrador Iron Ore Royalty (15%), while it also partially owns a railroad (the Quebec North Shore and Labrador Railway) and a deep water port in Sept-Iles in northern Quebec.

The miner may find it's just easier to tuck the iron ore asset back into its portfolio and wait for the market to improve -- at which time it may decide to keep operating the Canadian project itself if things have turned that far around anyway.

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