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Rio Tinto's A$1B Western Turner Syncline Phase 2 approved amid low price outlook

SNL Image
Western Turner Syncline 1 at Rio Tinto's Greater Tom Price operations in Western Australia.
Source: Rio Tinto

Western Australia's government has approved Rio Tinto's US$749 million, equivalent to A$1 billion, Western Turner Syncline Phase 2 iron ore project, which broker Morgans says should support continued favorable earnings even amid low commodity prices expected going forward.

The government's acting premier, Roger Cook, announced the approval on Dec. 23 for Phase 2, which should create more than 1,000 construction jobs, and includes a new crusher and a 13-kilometer overland conveyor to transport crushed ore to existing transfer infrastructure.

The conveyor will help lower the mine's greenhouse gas emissions by 3.5% compared to road haulage, and Rio Tinto said Nov. 27 when it sanctioned the investment that the business is "continuing to assess additional options" to reduce emissions, including renewable energy solutions.

The new phase of the Western Turner mine, about 35 kilometers northwest of Tom Price, will enable Rio Tinto to sustain approved production of 30 million tonnes a year, with construction due in the first quarter of 2020 and first ore to be delivered during the third quarter of 2021.

Cook said most of the technology and equipment needed to build the Western Turner proposal will be manufactured in the state, which is the world's biggest iron ore supplier, accounting for 39% of global supply in 2018.

Rio Tinto was on Western Australia Premier Mark McGowan's steel fabrication round table, convened in March, to create more opportunities for local steel fabricating businesses on major projects.

Lower prices likely

Morgans senior analyst Adrian Prendergast said that every marginal tonne added to his firm's model for Rio Tinto is "certainly supportive of a favorable net present value and earnings expectations."

This is particularly the case given the company is among the world's lowest-cost iron ore producers in the seaborne iron ore market.

"The strength of Rio Tinto's competitiveness is certainly trumping our outlook of a moderating iron ore price," he said in an interview.

Morgans increased its target price on Rio Tinto to A$91.64 per share from A$91.52 in October, with commodity price volatility identified as the key risk, believing there is some potential for the miner to add new growth to its portfolio via acquisition, although a significant transaction "seems unlikely."

Iron ore prices have moderated significantly from the highs seen around the time of Rio Tinto's last quarterly result in October, and Morgans still sees some further potential for prices to fall even more in 2020, driven by expectations of supply fundamentals "normalizing," or recovering.

S&P Global Platts IODEX 62% iron ore fines CFR North China closed at US$91.10 per dry tonne on Dec. 23, from US$85.70 per dry tonne at the end of the week in which Rio Tinto posted its last quarterly.

Slower manufacturing and construction activity outside the areas directly impacted by Chinese stimulus also weighs on Morgans' iron ore price expectations.

ANZ Research expressed a similar sentiment in its Commodities outlook 2020 released this month, which said improving iron ore shipments and weakening steel demand growth due to China's increased infrastructure spending will weigh on iron ore prices next year.

However, Rio Tinto will continue to benefit from the re-emergence of tough environmental policies and larger blast furnaces in China, leading to stronger demand for high-grade ore.

Platts said Dec. 23 that steel mills in Hebei and Shanxi provinces were heard to be undergoing a new round of sintering controls due to heavy smog in Northern China.

The Phase 2 project will see Brockman ore production support Rio Tinto's Pilbara Blend, which the company says is still the preferred base load product of Chinese steel mills.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.