HardAssetsInvestor

Written by Julian Murdoch  |

May 22, 2008

Rio Tinto’s Copper Lining

Details

Rio Tinto and BHP have been playing footsie for what seems like years now, but the game may be getting too long in the tooth.

• Rio's big copper find
• Chinese coal chicken
• Will a deal ever get done?

628 million tonnes.

That's a whole lotta (theoretical) copper in the ground, and it's all Rio Tinto's.

Rio Tinto announced last Friday an upgrade of the copper resource numbers for one of their existing mines in Utah. In December 2007, RTP estimated the mine had 9 million tonnes of copper resources. I guess they hadn't explored deep enough. The May 16 announcement of a further 628 million tonnes brings the mine's total to 637 million tonnes grading 0.48% copper. This is sort of like discovering that your nice little wine cellar in the basement sprouted an annex bigger than your actual house. A nice little bump in the mine's longevity, I'd say, and this is a big mine - it produces 13% of the copper used in the U.S. every year all by its lonesome. As this is copper in the ground, and not copper that is readily available, the market tucked the information into its back pocket and continued on its merry way.

 

 

Since the beginning of the year, copper stockpiles have been dropping due to high demand and tight supply, and prices have risen accordingly.

 

 

Now of course, this chart only goes to the end of April, and the picture has changed a bit since then, with copper stockpiles rising. The latest numbers from the London Metal Exchange, which is a good proxy for global copper supply, show LME copper stockpiles to be at 122,650 million tonnes, an 11.42% increase since the end of April. In that time, copper's price has (in a rare case of expected rationality) dropped 3.38%. The increase in stocks and decrease in price seem to be due to slower demand from China.

Beyond the global implications of demand versus supply of copper and the increase in this one mine's longevity, Rio Tinto gets another benefit from the announcement - ammunition. Rio Tinto has been saying all along that BHP Billiton's acquisition offer was too low, undervaluing RTP's resources. Even way back in May of 2007, Rio Tinto was talking up its untapped resources as the prime defense against a takeover - at that point in time the resource under discussion was uranium.

Coal

Neither Rio Tinto nor BHP have signed agreements with Nippon Steel and various Chinese steel makers for coal the steelmakers need. These agreements historically have been completed before the beginning of the fiscal year in April. Not this year.

The standoff has reached the point where Chinese steel makers have been calling for companies to boycott Rio Tinto's coal on the spot market, claiming that RTP has not delivered all of its previously committed long-term contract coal to China; instead, selling the coal in the spot market. Rio Tinto counters that it has met all of its obligations and has just taken advantage of some flexibility in those contracts to sell 10% of the contracted coal on the spot market. Hmm, I wonder why anyone would want to do that?