Employees at Rio Tinto’s (LON,NYSE,ASX:RIO) Hope Downs 4 mine in Australia will do better than a lump of coal over Christmas this year.
The Anglo Australian mega-miner announced last week that it is shutting the iron ore mine down for two weeks at the end of the year to “reduce operating costs and maximize cash to strengthen the business” – the latter a thinly-veiled allusion to the lagging iron ore sector. While the price of the steelmaking raw material is up nearly 70% this year, most analysts believe that demand from China and other iron importing countries is not enough to keep up with continued robust supply from the Big 3 major producers: Rio Tinto, BHP Billiton (NYSE,ASX:BHP) and Vale SA (NYSE:VALE).
The temporary shut-down affects 440 workers and is the first time since the financial crisis of 2008 that Rio Tinto has taken such a drastic measure to cut production. Employees can either take leave or work shifts at other mines. Hope Downs 4 in the Australian Pilbara is one of the largest iron ore mines in the country.
Rio reportedly told employees in an email that the mine had achieved its annual production target early, allowing the company to lock the gates mid-December. However the Financial Times reports an analyst at Citi saying that doesn’t really make sense considering the price of iron ore is sitting at US$72 a tonne. Clarke Wilson said the closure has more to do with limited rail capacity on Rio’s Pilbara rail network during the holiday season.
Underlying market fundamentals no doubt also played a role in the decision. By taking production out of the market, Rio might be able to keep prices higher into the new year and stave off the correction that some in the industry are predicting will soon occur.
There is also a political dimension to the temporary closure. The National party, one of the coalition partners in Western Australia’s government, has proposed a big tax increase on Rio and its competitor, BHP Billiton. The proposal would hike the production rental fee for both companies to AUD$5 a tonne from the 25 cents they currently pay. This is on top of the 7.5% royalty they already pay. Voters will decide the fate of the tax during state elections next March.
Rio Tinto took the opportunity of the closure announcement to ensure the state government sees that iron ore miners are vulnerable to more imposed costs:
“There couldn’t be a worse time to tax our business an extra $1.5bn [US$1.1bn] every year. This will destroy jobs, hurt local businesses and damage Western Australia’s international competitiveness,” the FT quoted Chris Salisbury, chief executive of Rio Tinto’s iron ore division, saying.
The company has been trying to rein in costs and raise capital, most dramatically by putting its Simandou project in Guinea on ice, followed by a decision in October to sell its Simandou stake to Chinalco for $1.3 billion.