The Motley Fool

Will iron ore end Rio?

Rio Tinto (ASX: RIO) has a history of building mines in developing countries that have huge potential but it is continually having trouble getting some of the projects online – perhaps it’s saved them just in time.

With soaring prices here in Australia and the availability of massive projects in Africa, Rio is looking to do to Africa what it did to Australia not that long ago. Just as the company prepares for first production of its massive Mongolian project in the middle of the Gobi Desert, people close to the matter are unsure when it will be officially opened.

The giant gold and copper mine was expected to sell its first metals last week, but the celebratory drinks have been postponed after many hard battles to get the mine up and running. Throughout its construction the company went through a bitter takeover of Robert Friedland’s Ivanhoe Mines, was delayed by a lack of infrastructure and water and attempts by the Mongolian government to be dealt more of the wealth from the project caused unnecessary headaches.

The biggest prize for Rio is the second stage of development, a US$ 5.1 billion operation that would turn it into the third-biggest copper producer on earth. However, with tensions already high and Rio’s balance sheets in cost cutting mode, it may take some time before the second stage will be underway.

In contrast to BHP (ASX: BHP), Rio has a long history of dealing with developing nations and has made it work for a number of decades. The Simandou iron ore project in Guinea is said to roughly be worth US$20 billion but is also quickly sliding from top of the company’s priorities.

Simandou still needs approval by both the government and Rio’s board as they seek to arrange a funding agreement. However, back in 2011, Rio said it would start production by 2015 – but it’s still a long way off.

Foolish takeaway

With the price of iron ore flailing and projects popping up everywhere, Rio’s Simandou will have to be delayed. The company’s $3 billion deficit in the year to 31 December 2012 is evidence of an over-reliance on the steelmaking ingredient. It also needs to scrap inefficient projects, which would prove to investors that management is being active and doing its job in mitigating losses caused by lower commodity prices. If it doesn’t, the company’s share price and shareholders won’t stand for it.

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Motley Fool contributor Owen Raszkiewicz owns shares in BHP.

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