With the Reserve Bank forecasting a sharp slowdown in our export income from minerals and commodities next year, it’s understandable that two major miners, Rio Tinto and Oz Minerals, have revealed plans to curtail output of some products or review other operations.
OZ Minerals is the world’s second largest zinc producer and it revealed yesterday that it had initiated a review of its capital and operational expenditure because of the volatility in financial and commodity markets.
The company told the ASX yesterday that the review would focus on managing cash balances, maximising free cashflow and ensuring that the company is able to fund all essential operating and project-related outflows.
"By closely reviewing our commitments now, we will ensure that we are in the best possible position to maintain our sound financial position and enable future development of our projects to generate growing value for shareholders," CEO, Andrew Michelmore said in the statement top the ASX.
OZ Minerals said the Prominent Hill copper and gold project in South Australia and the plant upgrade at the Sepon copper mine was on track, but all other projects were under review.
The company’s shares finished up 8c or 8.5% at $1.025..
Base metal prices have slumped and demand softened amid growing negative economic sentiment resulting from deteriorating global financial markets.
OZ Minerals has already reacted to the downturn and rescheduled operations at its Golden Grove mine in Western Australia to reduce zinc output and increase copper production, so the wider review is a natural follow up.
The company’s mining operations include the Avebury nickel mine and the Rosebery zinc mine in Tasmania, the Century zinc mine in Queensland, Golden Grove in WA, and the Sepon gold and copper mine in Laos.
OZ Minerals has a number of development projects, including the Martabe gold mine in Indonesia.
It has been reviewing operations at Century mine in far North Queensland. A curtailment of output there would be a very important decision, given Century’s size and importance to the company.
Prominent Hill and Sepon are close to completion, or the projects have reached a point where it would be cheaper to finish them than curtail or stop work.
Reality continues to strike the Australian resources sector, but so far it has missed the industry major, BHP Billiton.
Rio Tinto is the country’s biggest iron ore exporter and the apple of BHP’s takeover eye and yesterday Rio bowed to the reality of the worldwide steel lump and revealed a 10% cut in iron ore shipments.
The company told the ASX in a statement:
"Rio Tinto is today revising its estimate of iron ore shipments from the Pilbara region of Western Australia to between 170 million tonnes and 175 million tonnes (100 per cent basis) in 2008.
"As a result of the reduced demand from its customers and reduced shipments, the annualised run rate of iron ore production from its Pilbara mines will be reduced by approximately ten per cent.
Tom Albanese, Chief executive, Rio Tinto, said, "Operations continue to perform well but demand has continued to decelerate.
“This reduction is a prudent move to align production with revised customer delivery requirements in the light of the fourth quarter drop in Chinese demand.
“We believe this will be a short, sharp slowdown in China, with demand rebounding over the course of 2009, as the fundamentals of Chinese economic growth remain sound."
The decision follows a similar one 10 days ago from the world’s biggest iron ore shipper, Vale of Brazil, which cut its output 10% from the 2008 target of around 325 million tonnes.
Rio had been looking to boost output this year to around 190 million tonnes in the year to December 30.
Rio was joined by smaller rival, Fortescue Metals which is effectively cutting production 10% by bringing forward plant shutdowns for maintenance.
Fortescue lowered its annual production target by 10%, or 2 million tonnes, as a result of bringing forward the planned maintenance shutdown of its port and mine processing plant.
The iron ore miner said today it planned to meet its target of an annual rate of production of 55 million tonnes a year by the first quarter next year "subject to market conditions".
Fortescue has already indicated that a $2 billion project to expand output to 80 million tonnes a year could be delayed by six months in light of the weaker market for iron ore.
Last week the world’s biggest steel producer, Arcelor Mittal, revealed an earning slump, production cut of 30% on average this quarter, cost cuts of 50% next year and a sharp reduction in planned capital spending for 2009.
Rio is already suffering from lower aluminium and copper prices (as is BHP). BHP is also being hit by falling oil prices.
BHP has yet to announce whether it will be cutting production as well. It seems inevitable that it will follow, but a spokesman told the media yesterday that it had no intention of cutting.
"We have no plans to cut production and our strong balance sheet enables us to reinvest throughout the cycle," BHP spokesman Peter Ogden told AAP.
Both companies face downward pressure on 2009 coking coal and iron ore prices, but any reductions would still leave prices at their second highest level in history after the 85% rise for iron ore this year and a 200% plus jump in the contracted coal price with C
