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Rio Tinto expects coronavirus impact on Q1 demand, supply chains

London — Rio Tinto may feel the impact of the coronavirus in on demand for its products in the first quarter due to the "significant" near-term uncertainty that the virus has the potential to create, particularly in supply chains, executives at the diversified mining company said Wednesday.

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The company's "very successful" financial performance in 2019, supported by higher iron ore prices and a strong dollar, even amid a weakening in the global economy and most commodities, has nonetheless put the miner in a resilient position to cope with the uncertainties, according to CEO Jean-Sebastien Jacques and CFO Jakob Stausholm.

"There are two key drivers for the mining industry, global GDP growth and trade," Jacques said in a results presentation. "Today, we face a very uncertain world on both drivers, due to the outbreak of the coronavirus...the Chinese economy has already been impacted -- mainly the services, construction and manufacturing sectors -- and supply chain disruptions are a real possibility.

"Whether the recovery is V shaped or L shaped will be in part a result of peoples' ability to return to work. Today our iron ore books are full, but we are likely to see some short-term impacts, such as in our supply chains and possibly in the provision of services from Chinese suppliers."

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The Rio Tinto CEO noted that the Chinese government had many possible stimulus measures at its disposal "and we expect them to act. We believe this action will have a positive impact later in the year."

Analysts at brokerage Jefferies International acknowledged Wednesday that any stimulus from China from Q2 is seen likely to be "relatively commodity-intensive," which could favor Rio. Still, Jefferies sees that the risk to commodity prices in the near term is to the downside due to the demand shock to the markets due to the virus concerns, even though prices for iron ore and base metals have been "remarkably resilient" despite recent falls in equity markets.

For the analysts led by Christopher LaFemina, iron ore is "the gift that keeps on giving."

Jefferies said that "Rio Tinto is ramping up investment in its projects, with capex going from $5.5 billion to $7.0 billion, and iron ore prices should once again exceed consensus expectations....the Rio formula has worked in recent years, and we expect it to work again in 2020," they said, noting the company's 2019 EBITDA had come in higher than analysts' consensus.

IRON ORE REVENUES UP 29%

In 2019 the miner's EBITDA generation rose 17% to $21 billion, with a 47% margin, resulting in an industry-leading return on capital employed of 24%, Jacques said in a results statement. Operational cash flow reached $15.8 billion, while exploration investments reached $600 million in the year, reinforcing the company's commitment to seek new mineral reserves, he said.

However, net earnings fell due to impairments at the company's Oyu Tolgoi copper project in Mongolia and at the Yarwun alumina refinery, Stausholm said.

The company's iron ore revenues rose 29% during 2019 as prices averaged 39% higher than in 2018, touching a five-year high in mid-2019 supported by supply disruptions stemming from the Vale tailings dams accident in Brazil in January and very strong steel demand in China. Rio noted that global steel production exceeded 1 billion mt for the first time.

Operational challenges including significant weather impacts and a fire at the company's Cape Lambert port resulted in iron ore volumes being 3% lower, leading to higher cash unit costs across the group, with operating costs increasing to $14.40/mt, Stausholm said. Unit costs are expected to remain at $14-$15/mt in 2020, as shipment guidance for the Pilbara has been reduced to between 324 million and 334 million mt.

COPPER, ALUMINUM

Copper prices -- which often reflect the state of the world's economy -- and aluminum prices, were however both lower in 2019 than in 2018, the CFO said. The company's realized copper prices fell 7% in 2019 on lower production and lower mine grades while its aluminum business faced "very difficult market conditions" due to some operational disruptions, coupled with low prices and "structural power disadvantages."

"2020 is a transitional year, where copper production is expected to be impacted further by lower grades, particularly at Oyu Tolgoi and Kennecott. Higher grades will first be achieved with the completion of the Southwall Pushback project in early 2021," Stausholm said.

Rio Tinto said Wednesday it would invest $1 billion over the next five years as it targets net-zero emissions by 2050. Over the last 10 years the company has reduced its global greenhouse gas emissions by 46% and continues to invest in renewables, Jacques said. Last week the company announced a $100-million investment in a solar power and battery storage installation in the Pilbara iron ore producing areas of Western Australia, and will also invest C$ 55 million ($ 41.35 million) in Elysis, its breakthrough technology for aluminum, he said.