RIO CEO WARNS ON RISKS TO SUPPLY

Miner Rio Tinto has told investors it is listening to their worries over spending on major new projects, even as it warned of the ensuing risks to supply, as soaring costs and clamouring stakeholders eat away at incentives to build mines.

Increasing demands from governments, combined with capital costs that have doubled over the last four years and calls from shareholders for buybacks and special dividends, are denting the incentives to invest in new supply — something Rio warned on Thursday that forecasters may be underestimating.

“It is getting harder and harder to find supply, harder and harder to find resources. And resources are in places where stakeholder activism is tough and resource nationalism is tougher. It takes longer to get permits approved, if they get approved at all,” Rio Chief Executive Tom Albanese said.

“So the next five years is going to be a supply story; the last five years has been a demand story. I am not sure the economic forecasters have cottoned on to that observation yet.”

Soaring prices for labour, materials and power have dented profits and forced miners to review some potential growth projects. They are also facing increased demands from governments that want a larger share of the resources pie.

Meanwhile, investors have begun to fret over miners’ ever larger and more capital intensive projects, demanding that companies do a better job of balancing growth with the need to compensate shareholders with dividends and buybacks.

Rio, a day after BHP Billiton reassured investors at the same Sydney conference, said it was listening to concerns over spending discipline. But warned that would mean fewer projects across the sector. [ID:nL5E8G2HWZ ]

“Each of you in this room want more money back. You want buybacks, you want dividends, you want special dividends. You don’t want us spending as much money,” he said.

“We recognise that. We respect that. But what that means, and we are hearing it, we know our peers are hearing it, (is) there is going to be less supply coming in.”

Rio has more than $33 billion of major capital projects underway. Its largest projects include Oyu Tolgoi in Mongolia, one of the world’s largest copper-gold mines, and the expansion of iron ore operations in the Pilbara region of Western Australia, with a projected capital investment of $20 billion.

Analysts said Albanese had signalled in separate meetings that Rio would focus on high ranking projects like the Pilbara expansion to 353 million tonnes per year, but could push back projects in Australia where operating conditions are tough and competition for equipment, staff and other resources is intense.

Analysts said greenfield projects which could be pushed back include the proposed $2 billion Mount Pleasant coal project in New South Wales.

“Some of the comments around coal projects being at risk are clearly politically motivated ahead of potential removal of the diesel fuel rebate and overburden tax deduction in the (Australian) budget, but the capex and cost inflation is very real,” Citi analyst Clarke Wilkins said in a note.

Rio’s Albanese said in his presentation that operating conditions for coal miners in Australia were tough but stopped short of confirming a retreat.

He said separately the miner had no shortage of suitors interested in its diamond business, put up for sale earlier this year.

By Clara Ferreira-Marques