Rio Tinto Updates: Aussie 30% Mining Tax Will Weigh on Iron Ore, Coal Units

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Australian miner Rio Tinto (NYSE:RIO) will have to shell out more taxes after the Australian government’s decision to impose a new tax on iron ore and coal mining. Further, the company has decided to sale its stake in Extract Resources Ltd, which owns one of the world’s largest uranium deposits. Also, it faced a setback last week when the Australian government decided to re-examine the mining behemoth’s $1.4 billion Cape York mine expansion plan to assess environmental damages.

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

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More taxes to create a hole in pocket

The Australian government has passed legislation imposing a new 30% tax on iron ore and coal mining to cut its fiscal deficit. The tax will be applicable from this July and will affect mining giants such as Rio Tinto and BHP Billiton. New taxes could raise about $11.2 billion from mining companies in three years.

Iron ore and coal constitute about 40% and 11.5% , respectively, of our price estimate for Rio Tinto. The new tax will impact our estimate of the company’s value. ((Australia Passes 30% Tax on Iron-Ore, Coal Mining Profits, Bloomberg, March 20 2012)).

To sell its minority stake in Extract Resources Ltd

Rio Tinto has agreed to sell its 14.22% stake or about 36 million shares in Extract Resources Ltd to Guangdong Nuclear, China’s second-largest reactor builder. The company will get $8.65 per share, which could fetch close to $300 million before tax. Extract Resources is the owner of the world’s fourth largest uranium deposit, whereas Rio Tinto owns the world’s third-largest uranium deposit at Rossing. ((Rio Tinto Accepts Offer For Extract, RTT News, March 19 2012)). Uranium revenue doesn’t contribute significantly to the company’s value.

Last year, Rio Tinto’s uranium division didn’t perform that well as shipments declined by 38% due to maintenance activity and lower grade of mines. Further, the disaster at the Fukushima Dai-Ichi nuclear power station in Japan caused a worldwide plunge in uranium prices.

Hits roadblock for its Cape York mine expansion

The Australian government is reexamining its approval to Rio Tinto’s expansion plans at its Cape York mine. The government is worried that increased shipping activities post expansion could hurt marine park. The company is planning two new bauxite processing plants at the mine.  [1]

Aluminum constitutes about 20% of our price estimate for Rio Tinto. Any significant delay or failure to receive permission for its expansion plans could impact the company value.

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Notes:
  1. Australia To Weigh Reef Impact Of Rio Mine, WSJ, March 15 2012 []