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Rio Tinto expands copper extraction ahead of climate transition

On 27 September 2022, Rio Tinto plc (Rio Tinto) the approval of a US$55m (£49m) investment in its Kennecott copper operations based in Utah, US. The ‘development capital’ is to be used to allow the Anglo-Australian miner to resume underground mining at the Kennecott Copper Mine. Speaking on the move, Bold Bataar, chief executive of copper at Rio Tinto, stated the following:

‘This investment will allow us to quickly bring additional volumes of high-quality copper to the market and build our knowledge and capabilities as we evaluate larger scale underground mining at Kennecott. We are progressing a range of options for a significant resource that is yet to be developed at Kennecott, which could extend our supply of copper and other critical materials needed for electric vehicles and renewable power technologies.’

This is not the first time in recent memory that the miner has sought to expand its operations in areas besides the production of iron ore. On 6 September 2022, Rio Tinto entered into a with Turquoise Hill Resources Ltd (Turquoise Hill) in order to acquire the 49% stake in the Canadian mineral exploration and development company that it did not already own. However, under the rules of a Canadian Plan of Arrangement, the miner will require the approval of 66.67% of votes cast by all shareholders and a majority of minority shareholders. Turquoise Hill holds a 66% in the Oyu Tolgoi mine, based in southern Mongolia. The remaining shares are held by the state-owned company Erdenes Oyu Tolgoi LLC, as a representative of the Mongolian Government. The open-pit copper and gold mine, which represents the largest financial undertaking in Mongolia's history, is currently being in an effort to produce approximately 500,000 tonnes of copper per year between 2028–2036 and an average of 350,000 tonnes of copper per year for a further five years (163,000 tonnes of copper were produced in the mine during 2021).

That Rio Tinto has been increasing its future capacity to extract copper in recent months is perhaps unsurprising. Demand for copper is expected to be strong in the coming years, given its central role in global decarbonisation efforts, as a key component in the production of electric transportation and renewable energy infrastructure. Copper therefore proves central to the strategy outlined in Rio Tinto’s 2021 :

‘Copper is essential to the transition to a low-carbon future as it plays a key role in electrification and power generation, including in renewable energy and electric vehicles. Our operations span the globe, from Mongolia to Chile to the US, and occupy various stages of the mining lifecycle. With global decarbonisation goals set to drive growing demand for copper and other key commodities, our pipeline of growth projects strongly positions us as a partner in sustainable growth.

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‘Our strategy also focuses on growing in materials required to support the energy transition, such as copper, lithium, aluminium and high-quality iron ore. This will ensure our portfolio remains relevant and is well-placed to meet the commodity needs of future generations.’

This is despite a 20% in the London Metal Exchange price of copper, ‘as a wave of uncertainty surrounding the global economy and China's COVID-zero policy weighed on the prospects for copper demand’. 

Is geopolitics a reason for Rio Tinto’s commodity diversification?

However, perhaps another reason for Rio Tinto’s increased efforts in copper, besides the future-proofing of its mining operations within the climate transition, is the diversification of minerals at a time of increased geopolitical instability. Iron ore made up approximately of Rio Tinto’s total underlying EBITDA (US$10.4bn (£9.7bn)) for H1 2022—far ahead of any other mineral, with copper trailing at third (US$1.5bn (£1.3bn)). China, by far the world’s largest importer of iron ore, was the destination for 52.1% of the miner’s consolidated sales revenue over the same period.

However, the relationship between Rio Tinto and China has not always proved a dovetailing of mutual interests. Back in August, Market Tracker looked at how the Anglo-Australian miner was being forced to walk a geopolitical tightrope between Australia’s security interests and the company’s economic reliance on the Asian giant to its north (for more information, see: Rio Tinto treads carefully amid frosty geopolitical relations). In Rio Tinto’s , the miner noted that iron ore prices had fallen recently amid growing fears of weakening steel demand from China. This coupled with China’s recent decision to consolidate the country’s iron ore imports through a new centrally-controlled organisation called the China Mineral Resources Group, which has widely been seen as an effort by the country to improve the bargaining power of its steel industry vis-à-vis suppliers, has left the miner in an unenviable position. This is acknowledged in the ‘Principal risks and uncertainties’ section of the miner’s 2021 :

‘Increased trade tensions may undermine rule-based trading systems and lead to trade actions (increased tariffs, retaliations, and sanctions) potentially impacting our key markets, operations or investments. Current material threats include the potential development of further sanctions between Australia and China and the evolving situation of the coup in Guinea and, more broadly, the tensions between the US and China.’

The geopolitical tightrope has only become more precarious in recent months, as China increases its political grip on Hong Kong and its naval forces encircle Taiwan, despite rumblings in Beijing in relation to a possible rapprochement with Canberra.

It is therefore possible that the reopening of Kennecott Copper Mine’s underground operations and Rio Tinto’s attempt to fully acquire Turquoise Hill’s 66% stake in Mongolia’s Oyu Tolgoi mine represent a diversification of the miner’s operations in an effort to hedge the miner against fluctuations in the price of iron ore and the Chinese market, as well as protect against the current instability of geopolitics in Asia. This is supported by Rio Tinto’s 2021 , which states that its management responsibilities include ‘further diversifying our global commodity portfolio to include “greener” alternatives and alloys and critical minerals’.

However, this diversification does not mean deviating from the miner’s main cash cow. On 1 September 2022, Rio Tinto on the Chinese version of its website that it had held a video meeting with Yao Lin, chair of the China Mineral Resources Group ‘for candid and friendly in-depth exchanges on the industry situation and strengthening co-operation and common development’. During the meeting, Lin stated that the China Mineral Resources Group was ‘willing to establish a strategic partnership with Rio Tinto Group to jointly build a safe, efficient, win-win and sustainable industrial chain supply chain system, service high-quality development of the steel industry’.

Moreover, on 14 September 2022, Rio Tinto a joint venture between itself (54%) and its largest customer, the state-owned China Baowu Steel Group Co Ltd, (46%) to develop a new iron ore mine in the Pilbara, Western Australia. Construction is expected to start in early 2023, with first production anticipated in 2025. Speaking on the new venture, Rio Tinto’s chief executive of iron ore, Simon Trott stated the following:

‘This is a very significant milestone for both Rio Tinto and Baowu, our largest customer globally. We have enjoyed a strong working relationship with Baowu for more than four decades, shipping more than 200 million tonnes of iron ore under our original joint venture, and we are looking forward to extending our partnership at Western Range.’

Although relations between Australia and China remain frosty, both Rio Tinto and the Asian giant seem unwilling to fully cut ties with each other, trapped as they are in a symbiotic import/export relationship for the near future. It will be interesting to see whether this relationship wanes as the world moves away from carbon-intensive minerals, or whether both parties will succeed in developing a less environmentally damaging Chinese steel industry to feed the miner’s iron ore.

Rio Tinto’s has seen a slight uptick since late September following its recent announcements. However, it is still down on its April 2022 peaks, having not fully recovered from the disclosure of its second quarter production results.

Geopolitics and the wider FTSE 350 mining industry

Rio Tinto is not the only mining company in the FTSE 350 to be suffering amid the recent market volatility in the aftermath of Russia’s invasion of Ukraine and the cost-of-living crisis. 2022 has not been kind to the sector, with significant drops in share price among many of its constituents. Russian miners listed on the London Stock Exchange have also seen the temporary suspension of their shares due to a collapse in their share prices following the start of the Ukraine conflict and the ensuing sanctions regime imposed on companies with links to the Putin regime (for more information, see: FTSE 350 Q1 2022 reshuffle—Ukraine conflict sees board exodus at Evraz and Polymetal as share prices plummet).

Perhaps unsurprisingly, Ferrexpo plc (Ferrexpo), whose mining operations take place in central Ukraine, has been one of the hardest hit (for more information, see: Ferrexpo’s board takes flak as operations continue amid Ukrainian conflict). More recently, its share price saw a slight bump, as a successful Ukrainian counterattack pushed Russian forces away from the miner’s operations. However, Ferrexpo’s bounce back was short-lived, as its share price further on the news that the Ukrainian appeal court had reversed an initial judgment and invalidated a share purchase agreement concluded in 2002 in relation to shares in Ferrexpo Poltava Mining. As a result, a 40.19% stake in the mine is to be transferred to the claimants. Ferrexpo has since announced that it is currently ‘exploring all options, including its right to appeal this decision to the Supreme Court of Ukraine’. As of 4 September 2022, Ferrexpo’s was 132.80 pence per share—a 50.8% fall since the start of the year.

Another sufferer in the mining sector is Hochschild Mining plc (Hochschild). The gold and silver miner, which has operations in North, Central and South America, has seen its tumble 51.7% since the start of 2022. According to Hochschild’s for H1 2022, the main reason for this fall is rising inflation and interest rates, which seem to have had a negative effect on the price of precious metals: 

‘Following the Russian invasion of Ukraine in late February, all commodities rose strongly in response to expected supply deficits or as stores of value with gold passing $2,000 per ounce in early March. But since then, with inflation increasing substantially and the resulting steep interest rate rises likely to lead to dollar strength and global recession, we have seen a major pullback in our underlying commodities with gold and silver prices falling substantially from their recent peaks. This volatile market environment has presented challenges for our business but we can look forward to a busy second half with opportunities for value accretive investment in exploration and project development across our portfolio.’

However, Hochschild’s interim results also note that ‘political, social and economic risks in Latin America as a whole remain elevated’ and that the miner is ‘closely monitoring any new legislative, regulatory and local initiatives which could impact our exploration and operational activities’.

According to Hochschild’s Risk Heat Map in its most recent , political, legal and regulatory risk has increased during FY 2021 and become one of the most serious threats to the business.

This is especially the case for Hochschild’s operations in Peru, where one of the miner’s headquarters is based. The impact of the coronavirus pandemic on the South American country during 2020 subsequently led to a contested victory for Pedro Castillo of the left-wing Free Peru party, who become president in late July 2021. During his tenure, Castillo has increased state participation in the Peruvian economy, which has not been good news for Hochschild:

‘The government’s stated focus with regards to the mining sector was to implement a policy of enhancing “social profitability” which would see mining companies facilitating the promotion of local development, increasing State revenues and facilitating the redistribution of wealth.

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The political outlook for 2022 in Peru remains uncertain with opponents to mining accusing the Castillo Government of reneging on its commitments in the Coracora Act and calling for strikes and other action. Accordingly, the risk of stoppage has increased substantially, as well as the granting of new permits for explorations and operations under complex social conditions. In addition, with regional and local elections scheduled for October 2022, the risk of further political turmoil and polarisation remains high.

The Government has announced that it plans to submit a legislative bill to Congress to increase taxes on the mining sector during the first quarter of 2022.’

The miner is also keeping a close eye on Argentina, where there have been political setbacks for the country’s incumbent Justicialist Party. President Alberto Fernandez was forced to form a coalition government following the mid-term congressional elections during November 2021:

‘President Fernandez’s administration is expected to continue cautiously supporting mining activity, however its approach will be influenced by the dynamics within the coalition government and the general state of the economy which is expected to be dominated by high rates of inflation and limited growth.’

Rio Tinto, Ferrexpo and Hochschild are just three examples of companies in the FTSE 350 mining sector that are suffering amid market uncertainty and increased geopolitical risk. That geopolitical risk, or a similar term (political risk, conflict risk, etc), is mentioned in 100% of mining company annual reports during the 2022 AGM season is perhaps unsurprising given the precarious state of international relations at present. However, 10 out of 13 (76.9%) FTSE 350 mining companies have explicitly stated in their annual reports that geopolitical risk has increased over the course of the financial year.

Mining companies have long had to operate in some of the most precarious geopolitical environments on the planet. It will be an interesting industry sector to watch as the Ukraine conflict and the cost-of-living crisis begin to fully bite during the approaching winter months.