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: 2016 03 18 16:10
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Perry Williams
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Jean-Sebastien Jacques has been named as the new chief executive of Rio Tinto, a job iron ore
boss Andrew Harding had been widely tipped to get. Photo: Philip Gostelow
Rio Tinto's incoming chief executive Jean-Sebastien Jacques has been tipped to boost the miner's
stake in the vast Oyu Tolgoi copper mine in Mongolia when he replaces incumbent Sam Walsh
in July.
Mr Jacques, the current chief of Rio's copper and coal division, has hinted he will prioritise
improving the company's balance sheet and cost base as the miner navigates a crunch in the price
of many of the key commodities it produces.
But one London-based analyst says Rio will almost certainly look to boost its 33 per cent stake
in the Oyu Tolgoi copper deposit, considered the company's most exciting growth project.
Rio holds a 50.79 per cent stake in Canadian-listed Turquoise Hill, which owns 66 per cent of
Oyu Tolgoi, and broker Investec said mopping up the balance of the Turquoise Hill shares would
be a low-risk priority for the big miner given the strong competition for other Tier 1 copper
assets around the globe.
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"Rio will be very interested in Tier 1 copper assets but it's a crowded field," Investec mining
analyst Hunter Hillcoat said. "The only specific target would be consolidation of Oyu Tolgoi and
I see it as buying out the balance of Turquoise Hill."
It is thought the miner could buy the balance of Turquoise Hill stock for about $US2.3 billion
($3 billion).
Mr Hillcoat said he expected the Mongolian government to retain its 34 per cent stake in Oyu
Tolgoi, although an election timed for June, just weeks before Mr Jacques takes the chief
executive role, will undoubtedly have a bearing on the timing of any potential move by Rio.
Confidence to move
Several landmarks in 2015 handed Rio the confidence to increase its stake in Turquoise Hill,
including the development agreement for the second stage of Oyu Tolgoi that was struck with
the Mongolian government in May and the $US4.4 billion debt package that was secured for the
mine expansion in December.
Mr Jacques' elevation to the top role at Rio surprised many in the market because iron ore
division boss Andrew Harding was seen as the most logical successor to Mr Walsh, who was
promoted to the top job three years ago after heading the iron ore unit.
With iron ore constituting about 90 per cent of Rio's earnings, the division remains hugely
significant in the company's commodity stable and Mr Hillcoat said he thought Mr Harding
might stay on in his current role despite missing out on the top job, given volatility elsewhere in
the resources sector.
"Andrew will be disappointed, I'm sure," Mr Hillcoat said. "But this is not the bull market it used
to be. Any new CEO role he could take on would likely involve trying to resuscitate a struggling,
debt-ridden, once-major-now-minor miner versus the comfort of running an existing world-class
operation."
In an internal email to staff on Friday, Mr Walsh emphasised the achievements during his tenure
as boss, which included $US1.8 billion in asset sales and generating cost reductions of
almost $US2 billion.
"We have delivered what we said we would. We have improved safety, we have lowered costs,
we have reduced capital and working capital, we have focused on cash, we have strengthened the
balance sheet and we have delivered returns to shareholders," Mr Walsh said.
"But perhaps most importantly, we are now all acting as owners of the business. I am seriously
proud of the value we have delivered together, and I look forward to seeing what's to come."
mongolias-oyu-tolgoi-copper-20160320-gnmsti.html#ixzz43hHvTqAi
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Mr. Garamdagva travels with his wife once a month to a wholesale market in a town just over
Mongolias southern border with China to stock up on jeans, which he then sells for $10 each
back in Ulaanbaatar.
But customers are scarce these days. The boom times in Ulaanbaatar have come and gone along
with the rise and fall in commodities prices.
Now in his mid-30s, Mr. Garamdagvaalong with many of his fellow countrymenregrets
what he left behind, and faces an uncertain future laden with debt.
My sheep, goats, cows, horsesI sold everything, I cant go back, he says. I moved here for
a good life but, this year, we see no future.
Few developing countries have seen their hopes dashed more by the slump in global commodity
prices than Mongolia, this country of three million people that is almost four times the size of
California.
With its vast unexploited reserves of copper, coal and other minerals once estimated to be worth
more than $1 trillion, and a neighborChinagoing through a belated industrial revolution,
Mongolia looked to have won a ticket into the modern world.
The country became known as Minegolia as thousands of promising mining sites were
identified. Mongolias leaders envisaged riches from part-owning mines such as Oyu Tolgoi, the
worlds largest underdeveloped reserve of copper. Global companies including Rio Tinto PLC
and banks such as Goldman Sachs Group Inc. pursued mining rights and stakes in local lenders.
Mongolias prime minister is pushing for an increase in foreign investment to help stabilize the
economy, including a deal to expand the $6 billion Oyu Tolgoi mine in the Gobi Desert. Photo:
Bloomberg News
In 2011, Mongolia was the worlds fastest-growing economy, expanding by more than 17%. Its
former leader, Sukhbaatar Batbold, in 2012 forecast the country could keep growing at that rate
for a decade.
It was hoped the mining boom would enrich this nation of nomadic herders enough to be able to
invest in vital infrastructure, along with reliable water and electricity supplies.
Yet, Mongolia failed to make progress on key projects before the commodities boom subsided.
Oyu Tolgoi, now controlled by Rio Tinto, still awaits full development. At $5,000 a metric ton,
copper prices are roughly back at 2005 levels, having surged to more than $10,000 between then
and now.
Photos: Boom Times Fade in Mongolias Capital
Few developing countries have been hit harder by the slump in commodities prices than
Mongolia
1 of 15 fullscreen
Shoppers count their money at Naran Tuul market in Ulaanbaatar. The World Bank has repeatedly
downgraded its forecasts for economic growth in Mongolia as foreign investment slumps and local
people, worried about the outlook, spend less. SeongJoon Cho/Bloomberg News
Mongolias capital, Ulaanbaatar, which is home to around half the countrys population, enjoyed a
construction boom as the countrys economy surged. At its mid-2011 peak, Mongolias construction
sector expanded at more than 65% a quarter. Now, stalled projects scar the capital. Brent
Lewin/Bloomberg News
One of the tallest structures in Ulaanbaatar is a roughly 25-storey concrete shella stalled construction
project near Grand Chinngis Khaan Square and the parliament building. The developer, Eco
Construction, couldnt be reached for comment. Rhiannon Hoyle/The Wall Street Journal
As Mongolias economy expanded, international brands filled new shopping malls, such as the Hunnu
Mall in Ulaanbaatar. Taylor Weidmen/Getty Images
Several new hotels, such as the Shangri-La hotel, shown under construction on June 20, 2014, were built
in Ulaanbaatar amid an influx in business travelers as foreign investment rocketed and the countrys
economy surged. Now, vacancies are rising and hotels are running frequent specials to attract
customers, operators say. Brent Lewin/Bloomberg News
Yurts, known locally as gers, dot an area on the outskirts of Ulaanbaatar that was once grassland. The
ger district grew rapidly over the past two decades as formerly nomadic Mongolians moved to the city.
The area is now estimated to be home to nearly 800,000 people, more than half the citys population.
Rhiannon Hoyle/The Wall Street Journal
The Genghis Khan Statue Complex in Mongolias Tv province was completed in 2008, just as foreign
investment in the country began to rise. Construction of the 131-foot, stainless steel statue was
spearheaded by Mongolian businessman Battulga Khaltmaa. Rhiannon Hoyle/The Wall Street Journal
Chinese construction workers march off to lunch at the Oyu Tolgoi mine in the south Gobi Desert on
Oct. 11, 2012. The site, discovered in 2001 in Mongolias Khanbogd region, is controlled by Rio Tinto. An
open pit was built at the site, but stalled negotiations with government officials have delayed the
development of an underground mine there by several years. Paula Bronstein/Getty Images
Trucks move tons of ore at the open-pit mining area at the Oyu Tolgoi mine on Oct. 11, 2012. Rio Tinto
and its partners have lined up a combined $4.4 billion from 20 lenders to fund the proposed
underground expansion. Lawmakers once estimated the project, when fully developed, could account
for as much as one-third of Mongolias GDP. Paula Bronstein/Getty Images
The Mongolian Stock Exchange was founded in 1991, the year after Mongolias transition to a
democratic government. The exchanges top 20 index trades at its lowest level since 2010. Rhiannon
Hoyle/The Wall Street Journal
People walk past the headquarters of Golomt Bank, Mongolias largest private lender, on Grand Genghis
Khan Square in Ulaanbaatar. The World Bank has cautioned that Mongolias banking sector is under
strain as bad loans rise. Michael Kohn/Bloomberg News
Mongolian protesters in Ulaanbaatar on Feb. 9, 2015 demonstrated against a Canadian mining project
they say threatens ancient gravesites. Mongolia, with reserves of coal, copper, gold and other minerals
once estimated to be worth $1 trillion or more, was nicknamed Minegolia, but the once-burgeoning
mining sector has been a source of friction between lawmakers and some Mongolians. Johannes
Eisele/Agence France-Presse/Getty Images
The Mongolian property market has moved from a period of chronic undersupply to a glut, with tens of
thousands of apartments and roughly 140,000 square meters of office space estimated to be vacant.
Rhiannon Hoyle/The Wall Street Journal
A ninja miner uses a net to separate grit and rock as she searches for gold in Zammar, Mongolia. As
company-run mining operations experience temporary shutdowns due to weak commodity prices, some
unemployed workers are returning to traditional methods of panning for gold on Mongolias vast,
mineral-rich steppes. Tomohiro Ohsumi/Bloomberg News
As Mongolias minerals sector founders, lawmakers and business leaders are debating returning to
dependence on agriculture, or promoting sectors such as information technology, tourism, education
and financial services. SeongJoon Cho/Bloomberg News
Shoppers count their money at Naran Tuul market in Ulaanbaatar. The World Bank has repeatedly
downgraded its forecasts for economic growth in Mongolia as foreign investment slumps and local
people, worried about the outlook, spend less. SeongJoon Cho/Bloomberg News
Mongolias capital, Ulaanbaatar, which is home to around half the countrys population, enjoyed a
construction boom as the countrys economy surged. At its mid-2011 peak, Mongolias construction
sector expanded at more than 65% a quarter. Now, stalled projects scar the capital. Brent
Lewin/Bloomberg News
Mongolias economy is still eking out some growth, unlike countries such as Canada and Brazil,
which tipped into recession as the mining boom faded.
But between 2013 and 2015, the only mineral-rich developing countries that recorded a sharper
economic slowdown were those ravaged by conflict or epidemics: South Sudan, Sierra Leone
and Ukraine. In January, the World Bank cut its Mongolias growth forecast this year to just
0.8%. Two years ago, it forecast growth of 7.7% for 2016.
Mongolians like Mr. Garamdagva have arguably been left in a worse position than when the
mining go-go years began.
The Faces of Mongolias Crash
VIEW Interactive
We missed the big time; the free ride that we were given, said Ganhuyag Chuluun Hutagt,
Mongolias vice minister of finance from 2010-2012. No matter what happens to China, I
thought, we will still find something to sell to themwhich was not true, obviously.
On the steppes outside Ulaanbaatar stands an enormous 131-foot-high statue of the warrior
Genghis Khan on horseback, built by one of the countrys richest men during the boom years to
symbolize the return to greatness of a people that ruled an empire stretching from the Pacific to
Turkey 800 years ago.
The statue stands in contrast to the situation now in the city, known locally as UB, where
essential infrastructure was either never built or was poorly developed.
In packed district hospitals, for example, families sleep in the hallways and lobbies. On a recent
afternoon, Purevsuren Sergelen paced a corridor in Bayanzurkh District Hospital, nursing her 6month-old son, Tumenbayar, who was admitted three days earlier suffering from flu.
There are nine beds in my room and 18 kids are sharing beds with 18 mothersa total of 36
people are staying in one room, said the 21-year-old. The air quality is not good in a room, so I
take my baby in to the hallway most of the time.
Purevsuren Sergelens son, Tumenbayar, was being treated for flu at Bayanzurkh District Hospital in
Ulaanbaatar. Photo: Amarsaikhan Otgonbayar for The Wall Street Journal
She says she wishes new medical facilities had been built, or more beds added to existing
hospitals like this one. Long-held plans for a new hospital in downtown Ulaanbaatar sit on the
shelf.
Mrs. Purevsuren lives about 3 miles away in a sprawling settlement of white, round traditional
Mongolian structures and small brick homes that mushroomed on UBs outskirts as nomads were
drawn to the city. The so-called ger district is now home to nearly 800,000 people, according to
government estimates, more than half of UBs total population. There remains little access to
basic amenities such as running water.
Many Mongolians risk being dragged back below the poverty line again as the economy sinks,
according to the World Bank. Mongolias unemployment rate jumped to 8.3% in the final quarter
of 2015, from 6.3% a quarter earlier.
In November, a mining-union leader held a news conference to protest the worsening plight of
miners.
Families of the workers are starving, said Erdene Sambuunyam, the head of the Solidarity
trade union of state-run mining company Erdenes Tavan Tolgoi.
The news conference took a startling turn when Mr. Sambuunyam said he would burn himself
for our children and for the people of Mongolia.
He then set himself on fire.
Mr. Sambuunyam is now being treated in a hospital in Seoul. Erdenes Tavan Tolgoi paid his
medical expenses, a company spokesman said.
Mongolias economy has been floored by Chinas slowdown, which has unleashed a flood of
supply of commodities onto global markets, sparking a 20% drop in the S&P GSCI commodities
index over the past year.
There is little industry outside of Mongolias resources sector and no other country is as reliant
on China, to which Mongolia sends nearly 90% of its exports, mostly commodities.
With no access to the sea, and lacking sufficient transport infrastructure, Mongolian miners
arent able to chase potential buyers in new markets such as India and members of the
Association of Southeast Asian Nations, like other resource-based countries can.
Residential property prices in Ulaanbaatar have plunged over past four years, with towering apartment
blocks standing empty around the city. Photo: TAYLOR WEIDMAN/GETTY IMAGES
A few years ago, Mongolia boasted one of the worlds fastest-growing economies. Now, the World Bank
is expecting growth of just 0.8% this year. Photo: Taylor Weidman/Getty Images
Some in Mongolia blame political indecision and missteps for the countrys problems.
After issuing free shares in the Tavan Tolgoi coal project to citizens in 2011, the government
was forced to introduce a program to buy them back a year later for 1 million tugrik ($500) per
person, after plans for an initial public offering of the company collapsed.
Ahead of elections in 2008, politicians had also promised to dole out cash, spending on the
promise of riches to come. For more than a year, the government handed out about $17 a month
to all Mongolians.
The budget is still paying back the debt, said Oyun Sanjaasuren, a member of the current
governing coalition.
Rio Tintos plans to expand the Oyu Tolgoi mine in the Gobi desert are now running years
behind, a victim of fraught talks with Mongolias government that wanted a bigger slice of the
revenue pie.
The expansion could yet go ahead: In December, Rio Tinto and its partners lined up a combined
$4.4 billion from 20 lenders to fund the construction of an underground mine three times as deep
as the Empire State Building is tall. Still, output from the expanded mine will only start in 2021
at the earliest.
Meantime, Mr. Garamdagva, the former farmer, fears the long, harsh winter isnt over for
Mongolia and his family. He has had to borrow from fellow stall owners to help cover monthly
debt repayments.
We cant pay it back, Mr. Garamdagva said, taking a swig of local tea, laden with milk and
thick with salt. We will for sure have to take more loans onbut individuals dont have any
money any more so I dont know who we will get a loan from next time.
Zhuang Fu Lai 1 day ago
Due to environmental concern, China should stop buying any mining product from Mongolia.
Profit-pumping Turquoise Hill hopes for Oyu Tolgoi underground decision by Q2 18th March
2016 By: Henry Lazenby Creamer Media Deputy Editor: North America EMAIL THIS
ARTICLE Reuse this TORONTO (miningweekly.com) Rio Tinto subsidiary Turquoise Hill
Resources has declared 2015 net income attributable to shareholders of $313.3-million, or $0.16
a share, compared with net income of $26.9-million, or $0.01 a share, in 2014 an increase of
$286.4-million. The Vancouver-based company advised that the increase was mainly attributable
to a $210.2-million noncash impairment charge recorded in 2014 on the reclassification of its
coal-focused subsidiary SouthGobi to assets held for sale, and a deferred tax asset of $165million recognised in 2015, partially offset by adjustments for inventory write-down of $103.2million. Operating cash flow before interest and taxes in 2015 was $650.5-million, compared
with $718.5-million in 2014, reflecting the impact of lower commodity prices on sales revenue,
offset by the continued production and delivery cost improvements and effective working capital
management. Revenue of $1.6-billion in 2015 was down 5.8% year-on-year, reflecting lower
copper and gold prices partially offset by higher volumes of copper-gold concentrate sales.
Concentrate sold in 2015 of 819 800 t was 11.7% over 2014, reaching an all-time yearly high,
the miner advised. All-in sustaining costs in 2015 were $1.37/lb of copper, compared with
$1.95/lb in 2014. The decrease was mainly owing to volume increases, cost optimisation and
operational efficiencies, partly offset by reduced gold and silver credits per pound of copper
produced, combined with the impact of nonrecurring and noncash items. As at December 31,
Turquoise Hill's cash and cash equivalents were about $1.3-billion. Oyu Tolgoi was expected to
produce 175 000 t to 195 000 t of copper and 210 000 oz to 260 000 oz of gold in concentrates
for 2016. Turquoise Hill advised that about 90% of Oyu Tolgoi's expected 2016 concentrate
output had already been sold. UNDERGROUND DEVELOPMENT On December 14, Oyu
Tolgoi signed a $4.4-billion project finance facility for the $6.8-billion underground expansion
of its massive Oyu Tolgoi copper/gold mine, in Mongolia one of the largest in the mining
industry. The facility was provided by a syndicate of international financial institutions and
export credit agencies representing the governments of Canada, the US and Australia, along with
15 commercial banks. Turquoise Hill owned a 66% stake in the Oyu Tolgoi mine, with
Mongolian government agency Erdenes Oyu Tolgoi holding the balance. According to Turquoise
Hill, underground prestart activities were under way in parallel with an update to the feasibility
study capital estimate, which was expected to be complete before the end of the month.
Turquoise Hill, Rio Tinto and Oyu Tolgoi continued to work towards completing the 2016
feasibility study, including the updated capital estimate, and securing all necessary permits for
the development of the underground mine. Once these steps had been completed, the full $4.4billion facility would be drawn down by Oyu Tolgoi subject to satisfaction of certain conditions
precedent typical for a financing of this nature. This was subject to the company boards' approval
of a formal 'notice to proceed', Net proceeds from the project finance facility, after fees and
taxes, were expected to be about $4.1-billion and would be used by Oyu Tolgoi to pay down
shareholder loans payable to Turquoise Hill. The net proceeds would then be available to be
redrawn by Oyu Tolgoi for the development of the underground mine. Turquoise Hill expected
the notice-to-proceed decision for underground construction in the second quarter. The longstalled underground mine was expected to boost Mongolia's economy by a third when it reaches
full capacity in 2021. Before the project was suspended in August 2013, underground lateral
development at the Hugo North deposit had advanced about 16 km off Shaft 1. The sinking of
Shaft 2, the main operations access and the initial production hoisting shaft, had reached a depth
of 1 168 m below surface, 91% of its final depth of 1 284 m. The 96-m-high Shaft 2 concrete-
head frame had been built and the sinking of Shaft 5, a dedicated exhaust ventilation shaft, had
reached a depth of 208 m 17% of its final depth of 1 174 m. Surface facilities, including offices
and a workshop, were in place to support initial preproduction development and construction.
The Oyu Tolgoi mine had initially been developed as an openpit operation. A copper
concentrator plant, with related facilities and necessary infrastructure to support a nominal
throughput of 100 000 t/d of ore, had been built to process ore mined from the Southern Oyu
openpit. Long-term development plans for Oyu Tolgoi were based on a 95 000 t/d underground
block-cave mine.
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: 2016 03 23 08:40
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A second not-so-well-kept secret is that mega miner Rio Tinto (NYSE: RIO; LON: RIO) is on
the look-out for long-life copper assets to add to its production portfolio. Rio added a little fuel to
the fires of speculation on March 17, when it announced CEO Sam Walsh would be retiring and
that copper and coal chief Jean-Sbastien Jacques would be stepping up to lead the company.
Interestingly, Rio has a history of appointing chief executives from its high-priority segments.
Walsh took the job in 2013, after running the companys iron ore and aluminum businesses.
In addition, Jacques earned the top job at Rio largely due to his success in navigating the
sociopolitical quandary in Mongolia, where Rio runs the Oyu Tolgoi copper mine through its
51% interest in Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ). The companies made big
strides in 2015, via a landmark, US$4.4 billion finance and development agreement that resolves
outstanding issues with the Mongolian government and sets the stage for a large-scale
underground expansion at the mine.
Meanwhile, Canaccord Genuity adds that the management change at Rio could lead to
increased appetite for opportunistic acquisitions. Canaccord also notes a recent revision in a
metal purchase agreement between Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND) and
junior Entre Gold (TSX: ETG; NYSE-MKT: EGI) involving the Hugo North Extension and
Heruga expansion opportunities at Oyu Tolgoi.
It's early days of course, but Rio Tinto is providing something of a master class in handling
succession and managing expectations for the incoming leader.
The appointment of Jean-Sbastien Jacques to replace Sam Walsh was always going to get the
market excited about the direction the new man might look to take the business.
Would it be a big copper deal, the division he currently heads up? Would he look to do
something with Rio's aluminium division, which many see as a work in progress? Would the
focus switch from miner's iron ore division, the engine room of the company run by Andrew
Harding, who was overlooked from the top job?
The response has been consistent: steady on.
First the chairman, Jan du Plessis, declared there would be no major change in strategy.
Then it was the turn of Walsh.
"Our basic strategy is very simple: to invest in low-cost, long-life, expandable assets. We look at
the opportunity for investment, rather than focusing on a particular commodity or a particular
location. We look, opportunistically, at the value associated with the best projects in our
portfolio," he said at the China Development Forum on Monday.
"From our portfolio of current and future projects, they are across a broad range of our
commodities, aluminium, iron ore and copper."
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Walsh went on to list a number of Rio's current projects, and then specifically addressed the
copper elephant in the room.
Walsh said he was "personally delighted" with the choice of Jacques and declared Rio is "in
good shape for whatever growth path we take in the future as a result of the last three years' work
repositioning the company".
In particularly, Walsh pointed to cutting costs by $US6 billion over the last three years, cutting
working capital by $US4 billion and slashing capital expenditure by $13 billion.
What Sam didn't say is that for all the "no strategic change" messaging, this hard work puts his
successor in a perfect position to do something when the time is right.
We're just going to need to be patient.
Mr Walsh is to step down on July 1. The naming of Mr Jacques, Rios copper and coal boss, to
the top job over Rio iron ore boss Andrew Harding caused surprise in some quarters.
Mr Jacquess elevation over Mr Harding was taken by sell analysts as a signal that iron ore was
now ex-growth, and that copper was the growth focus, even if Mr Harding was previously Rios
copper boss.
Mr Walsh said it was a great time for a change of chief executive.
The business is stable and we are now back to the strength that we had in the past, and it provides a good timing for a change of CEO. My successor is a very bright guy, Mr Walsh said
of Mr Jacques, Rios first French chief executive, though the French-born and educated
executive says he is British by virtue of his British passport.
Mr Walsh said Rio was in good shape for whatever growth path it takes as a result of his past
three years work repositioning the company.
And continuing his penchant for talking in the third person, Mr Walsh said: In relation to Sam
Walsh, I will be retiring from Rio Tinto but, let me assure you, I will not be retiring from life.
Rio Tinto plcs (ADR) (NYSE:RIO) shareholders have expressed worries regarding the appointment of new
CEO, Jean-Sbastien Jacques. Investors want the Frenchman, who will replace Sam Walsh in July, to
focus more on the companys iron-ore business segment and to develop the companys copper assets,
before pursuing acquisitions.
The appointment has been seen by many as an effort to reduce the companys dependence on
iron ore. Sanford C. Bernstein analyst Paul Gait said: It is our belief that this signals a change of
direction for RioTinto, given the type of experience that Jacques brings to the role. We see this
as speaking to a de-prioritization of the iron ore business and operational management per se,
and a reprioritization of strategic vision and an M&A agenda.
Rio Tintos iron ore, considered one of the finest quality mineral in the business, produced about
90% of the companys revenue in 2015. Shareholders want Mr. Jacques to be careful before
making any consolidation efforts. Argo Investments portfolio manager, Andy Forster said: We
don't want them to be going out and aggressively acquiring stuff." Argo Investments is the
second-largest Australian stakeholder in Rio Tinto.
The newly-appointed CEO is in for a tough time as he will have to maintain a balance between
keeping investors happy and steering the company away from the iron-ore business. Investors
have shown a keen interest in knowing what assets the company plans to divest and want Mr.
Jacques to have a more conservative approach toward the company.
Iron-Ore Price Blues
Iron-ore prices have been in decline and are projected to decrease even further. According to a
recent research report from Morgan Stanley, iron-ore prices are expected to fall 14% to $40 in
2016, with major gluts in prices to be toward the latter half of the year.
Miners across the world are increasing iron ore production to keep cash flow coming in. This has
caused an excess supply in the market, pushing prices down even further. Despite a break in
supply because of harsh weather conditions in Australia, miners have revamped their production.
Demand for iron ore from China has been very sluggish and is expected to decline further. This
is despite the fact that the countrys policy makers have tried to inject money twice into the
economy to create better liquidity, and attempted to increase construction after the Chinese New
Year break. Both attempts have failed, and the region still hasnt been able to recover from its
economic slowdown.
The countrys steel production is also on the decline because of a reduction in construction
throughout the nation, and a 266% import duty tax from the government on Chinese steel.
According to the statistics bureau, steel production in China fell 5.7% year-over-year (YoY) to
121.1 million tons in the first two months of 2016. More than 60% of the companys iron ore is
consumed by the Chinese economy. With a decrease in the commoditys demand from the
worlds largest iron ore consumer, production is expected to continue declining further. The
CEO will have to be very careful in expanding iron ore production, as the outlook for the
commodity doesnt appear bright.
Invest in Copper, Mr. Jacques Own Territory
The company continues to rely heavily on iron ore, despite the depleting prices. As mentioned,
90% of its revenues were from iron ore. Given the current position of the industry, it might be a
suitable time for Rio Tinto to shift its focus toward other commodities, particularly copper. The
company could also divest some of its assets in the iron ore segments.
Mr. Jacques was previously head of the Copper and Coal business segment at Rio Tinto. He has
ample amount of expertise in the industry and a great portfolio to back him up. The executive
bagged a mammoth $4.4 billion deal with the Mongolian government for the expansion of the
Oyu Tolgoi mine in December. He is likely to use his expertise and contacts in the industry to
further strengthen the mining giants position in the copper industry.
One potential growth strategy for the copper segment is to consolidate with arch-rival BHP Billiton
Limited (ADR) (NYSE:BHP), as CEO Andrew Mackenzie said the company was looking for a mergeracquisition in the copper industry.
Investors were shocked at Mr. Walshs retirement, as they didnt expect it to come so soon. He
had been the CEO for a little over three years. However, what surprised the investors more was
the appointment of Mr. Jacques, whose copper and coal unit made up just 6% of the groups
earning in 2015. By comparison, the front-runner for the job, Andrew Harding produced nearly
90%. Jean-Sbastien Jacques has been named deputy chief executive with immediate effect.
Editing by Sarah Janjua; Graphics by Mansoor Shafqat