Denials as miners are doing a runner

[miningmx.com] — RIO Tinto’s retreat from South Africa continues with the decision to sell its 57.7% controlling stake in the country’s major copper producer – Palabora Mining (Palamin).

The diversified resource giant now finds itself in the same boat as diamond heavyweight De Beers in that both have been steadily selling off assets in South Africa while maintaining all along they are not divesting from the country.
Both are now down to one key remaining asset – the Venetia diamond mine in the case of De Beers and a 37,5% stake in titanium producer Richards Bay Minerals (RBM) in the case of Rio Tinto.

The suggestion that Rio Tinto may be “doing a runner’ touches a very raw nerve at the group, judging by the furious reaction from vice-president Jean Chawapiwa-Pama to the story when initially run on Miningmx.

She stridently denied that Rio Tinto was divesting from South Africa and maintained that the decision to sell the Chapudi coal project in 2010 and now Palamin was based purely on sound business fundamentals.

She maintained that Rio Tinto was still active in the country looking for world class projects and expressed disbelief that this was not crystal clear to me, declaring: “I am very disappointed with you. I am wondering if it’s worth my time continuing to talk to you.’

The point that I, unsuccessfully, tried to make to Chawapiwa-Pama is that there is a glaring anomaly between what Rio Tinto says it’s doing in South Africa and what it has actually done here.

In 2007, the group was talking up its South African projects – in particular Chapudi – which it sold last year for a bargain basement price of $75m to Coal of Africa and then went and spent $4bn on buying control of Riversdale Mining to acquire its coal projects in Mozambique.

De Beers, I should point out, takes a far more unruffled stance when it comes to dismissing such suggestions.

For the record, the latest denial comes from chairperson Nicky Oppenheimer who tells me the sale of major mines such as Cullinan and Finsch was a “straight business decision’.

He comments: “Cullinan and Finsch might have continued to contribute in the immediate short term but they no longer fitted the De Beers’ model.

“They have substantial remaining ore bodies but the capital to exploit them is so substantial and the return would take so long in our view to arrive that it simply did not work,’ he says.

Some diamond industry observers and participants beg to differ on that assessment – not least Petra Diamonds which bought both mines – and Rio Tinto’s decision to sell out of Palamin already has mining industry executives scratching their heads.

The reason is that – in a copper bull market where the main problem seems to be finding enough supplies of the metal to meet rising demand – then keeping Palamin should be “a no-brainer’ according to one senior mining company executive speaking on condition of anonymity.

The same reasoning – by the way – can also be applied to De Beers’ decision to sell the Cullinan and Finsch mines, both of which are still major producers with considerable remaining resources in a situation where the diamond market is booming and the main concern is over future supply.

Oppenheimer comments: “The supply/demand equation is looking extremely good for diamond producers. Demand is growing and no major new mines have been discovered.

“That means that when a major new mine is found – hopefully by De Beers – it is going to be seven to 10 years from now before those diamonds become available.’

According to Rio Tinto – in a statement endorsed by partner Anglo American, which also intends selling off its 16,8% minority stake in Palamin – “the copper operation is not of a scale to suit Rio Tinto or Anglo American’s investment criteria’.

Let’s put that in perspective. Palamin is certainly in not the same league as the behemoth open-pit mines that both groups operate in South America.

The Escondida mine in Chile produced 300,000t of refined copper in 2010 of which 90,000t was attributable to Rio Tinto through its 30% equity stake. Palamin that year produced 57,984t of refined copper.

But Palamin is the only major producer of copper in South Africa, and importantly, its operations extend well downstream on the beneficiation value-add chain.

Small copper producers sell their production in the form of concentrates. If the mine is large enough to justify investment in a refinery, then they upgrade the concentrates and sell the metal in the form of copper cathode.

Palamin takes the beneficiation process even further turning most of its cathode production into higher value copper rod.

For the past two years, Rio Tinto has been sizing up the project known as “Lift Two’ which is required to extend the life-of-mine from the present cut-off date of 2016 to 2030.

Palabora operates using the “block caving’ mining technique, and whoever buys Palamin is going to have to spend money, which could run to about R2bn.

Given the outlook for the copper market and the fact the orebody has been shown to continue at depth, the decision should be a positive one.

But it seems Rio Tinto is now voting with its feet to avoid the investment.

This, of course, is not the first time that Rio Tinto has played the role of “elder ugly stepsister’ to Palamin’s “Cinderella’.

In September 2005, Rio Tinto refused to put its own money behind Palamin when the company got into financial difficulties during the transition from opencast to underground mining operations.

“I am very disappointed with you. I am wondering if it’s worth my time continuing to talk to you.’ – Jean Chawapiwa-Pama

Instead, Rio Tinto required Palamin to borrow R1.28bn from a banking syndicate which insisted that Palamin hedge a sizeable chunk of expected production. Such a requirement is usually anathema to any mining major, which believes in the future of the metal it mines.

The hedge was made at a copper price of R15,739/t. The current copper price is around R63,000/t. Rio Tinto’s parsimonious attitude cost Palamin a total of R5.3bn in lost revenue between 2006 and 2010. The hedge only expires in 2013 and, as of end-December, it stood in Palamin’s books as a derivative instrument with a negative value of R3.2bn.

Palamin’s other major project involves the hundreds of millions of tonnes of magnetite ore mined as waste material during the life of the open-pit mine and stockpiled on surface.

It’s essentially a low-grade iron ore which could be beneficiated into iron if a smelting plant was built on site. Palamin, along with the Industrial Development Corporation, has been looking at this for years.

Rio Tinto has now decided to pass on the development of this project as well.
The company statement declared that: “Future value creation at Palabora is likely to involve the on site processing and beneficiation of magnetite, an opportunity that Rio Tinto and Anglo American believe will be best developed under different ownership.’

So that leaves Rio Tinto with its 37,5% stake in Richards Bay Minerals.

That should be a core asset. Rio Tinto is one of the major players in the business through subsidiary Rio Tinto Iron and Titanium, which operates in Canada and Madagascar as well as South Africa.

I guess we will find out in due course.

– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.