Rio Tinto Updates: Indian Iron Ore Project, Potential Aluminum Production Cuts

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Rio Tinto (NYSE:RIO), a global diversified miner, is considering various strategic options including capacity cuts and layoffs at its Tasmanian unit. The company is, however, confident in its iron ore business and has announced a $2 billion investment in India. Rio Tinto’s product portfolio spans across basic metals like iron ore, copper and aluminum to energy products like coal and uranium. It competes with other mining giants like Vale (NYSE:VALE), BHP Billiton Limited (NYSE:BHP) and Freeport McMoran (NYSE:FCX). We are in the process of revising our price estimate for Rio Tinto.See Full Analysis for Rio Tinto Here

Aluminum business still causing headaches

Rio has announced that it is reviewing its aluminum operations in Tasmania and may announce capacity and job cuts. The Tasmania smelter produces about 177k tons of aluminum annually. Significant supply, weaker margins and weak prices are forcing miners to revisit their strategies for the aluminum business. Rio announced plans to sell part of its aluminum business last October. The appreciation in the Australian Dollar is also causing some problems for the company. [1]

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Last month, the company announced higher than expected impairment charges related to its aluminum business. Rio has written down nearly half of its investment in Alcan, which it bought for almost $38 billion.

$2 billion investment in India for iron ore expansion

The dim short-term outlook for iron ore and a slowdown in demand from China have not deterred Rio from expanding its iron ore capacity. The company has announced plans to invest $2 billion in the Indian state of Orissa to cater to Indian and overseas demand. The company is not expecting any major roadblock in getting approvals in India, where slow processes have hampered some foreign investments in the country. [2] We discussed the iron ore outlook in our recent article Vale Facing Legal Issues, Weak Iron Ore Outlook.

Iron ore constitutes 53% of our price estimate for Rio Tinto. Accordingly any significant expansion in iron ore capacity could impact our estimate of the company’s value.

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Notes:
  1. Rio Tinto looks at options for Tasmania smelter, March 4 2012 []
  2. Rio Tinto to invest $2 bln in Orissa iron ore project, March 5 2012 []