Rio Tinto remains confident that China’s seemingly insatiable demand for minerals and other commodities will continue.
But to feed this demand, the company is raising the risk profile of its exploration efforts as it searches the world for more minerals.
RIO is looking in a total of 35 countries around the world, from the old Soviet Union, to Guinea in Africa, Indonesia, Australia, the US and in the Arctic.
It is a conscious decision to step up the pace of exploration that has seen the group boost spending in this area to well over $400 million a year.
The mining giant’s chairman Paul Skinner said in the 2006 annual report, released yesterday, that the resource boom will continue.
He forecast positive growth in most of the major economies, particularly China in 2007.
Mr Skinner said in his chairman’s review in the annual report that “The global economy remains resilient in the face of a range of political and economic risks.
“We expect a continuation of positive economic growth in 2007 in most of the major economies.
“China’s strong, growing demand for metals and minerals, which has been a key driver of market strength, seems set to continue.”
But he did single out the tight supply of skilled labour and shortages of tyres and explosives would reinforce the strength of the current cycle and keep prices at high levels.
“On the supply side, a number of constraints, ranging from shortages of key consumables, like truck tyres and explosives, to the tight supply of skilled technical managers and tradesmen, have limited the growth of new production capacity,” he said.
Western Australia, where Rio’s Australian operations are centred on iron ore, and in Queensland where they are based on coal, bauxite, alumina and aluminium, have reputations for being high cost areas to operate at the moment: on a world wide basis, not just in Australia.
That’s because of the intensity of shortages
However Mr. Skinner pointed out that an offsetting trend was the continued low level of stocks of commodities, such as metals and ores.
This he said had resulted in “tight markets” a point that BHP Billiton made in its 2007 interim profit statement when discussing the reasons for its optimism that the resources boom had a while to travel.
“This has reinforced the strength of the current cycle and we expect prices in 2007 to continue at levels significantly above the long term trend,.” The Rio chairman said
Rio earned $US7.438 billion ($A9.53 billion) in 2006, its third year of record earnings in a row.
The company’s share price eased on the back of lower prices for copper and then rebounded and closed at $74.84, up 34c.
Amid the reams of material in the annual report was a discussion of the company’s growing exploration budget: the lifeblood of a mining company.
More than $400 million was spent last year in around 35 countries on a host of prospects, projects and proving programs from initial discovery all the way to pre-feasibility projects on iron ore projects in the Pilbara, copper in the US, industrial minerals in Serbia, diamonds and coal in various countries, bauxite in Africa, and other prospects.
For mining companies of all sizes, exploration is vital: finding, outlining, proving up and then readying mineral deposits for the future is a key skill, as is proving that they might be too small for a giant the size of Rio and that they would be better off in a smaller company.
Rio’s mineral exploration efforts were outlined in the annual review and report.
Clearly it’s a high risk activity.
Rio Tinto said its statistics show that an average of only one in 350 mineral prospects that are drill tested result in a mine for the Group.
“Rio Tinto believes in having a critical mass of projects, selected through a rigorous process of prioritisation.”
The Exploration group is organised into five geographically-based teams in North America, South America, Australasia, Asia and Africa/Europe and a sixth project generation team that searches the world for new opportunities and provides specialised geological, geophysical and commercial expertise to the regional teams. At the end of 2006, Rio Tinto was exploring in over 35 countries for a broad range of commodities including copper, diamonds, nickel, industrial minerals, bauxite, uranium, iron ore and coal. Exploration employs about 180 geoscientists around the world and has a total complement of approximately 900 people.
Eric Finlayson was appointed head of Exploration, based in London, from January 2007, succeeding Tom Albanese, director, Group Resources, who becomes chief executive of Rio Tinto from May 2007.
Rio said that the expenditure on exploration in 2006 was US$345 million (around $A430 million), an increase of US$81 million (around A$98 million) over 2005, reflecting an increase in contractor costs, the high quality of projects in the exploration pipeline and acceleration of evaluation on significant projects.
The pre-tax charge to underlying earnings was US$237 million, due to the sale of Ashton Mining of Canada shares and various other interests during 2006.
Rio said that cash expenditure on exploration in 2005 was US$264 million and the pre-tax charge to underlying earnings was US$250 million, a US$60 million increase over 2004, reflecting a further increase in iron ore exploration in Western Australia.
“Since 2001 six projects have moved from Exploration to the next stage of project evaluation including Resolution (copper, US), Potasio Rio Colorado (potash, Argentina) and Simandou (iron ore, Guinea).
“Last year, five iron ore deposits in the Pilbara were transferred to the product group evaluation team.”
Rio Tinto also conducts near mine exploration around a number of operations. Where resources have been supplemented or additional resources discovered this has been report
