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Despite cash inflows, iron ore miners see different futures

SURFACE MINING

Despite cash inflows, iron ore miners see different futures

Despite a recent drop in the price of the steel raw material, major iron ore producers are awash in cash and are likely to remain so. Where they disagree is on what they believe will be the next significant profit drivers.

Rio Tinto, the world's largest iron ore miner, reported record first-half profits in 2021, with underlying earnings nearly tripling to USD12.17 billion from the same period a year ago.

Despite shipping 12 percent less iron ore in the second quarter than the same period a year ago due to storms affecting Rio's Western Australia state operations, the company's profits soared. BHP Group and Fortescue Metals Group, Australia's second and third-largest iron ore miners, are expected to join Rio in reporting record profits.

For the 12 months to end June 2021, BHP reported record full-year iron ore production, despite a slight drop in fourth-quarter output. Fortescue exceeded its full-year iron ore shipment forecast thanks to a record fourth-quarter performance. For iron ore delivered in north China, the spot price fell to USD180.15 per ton at the end of July 2021, down 10.5 percent from the previous week.

However, by historical standards, iron ore is still at extremely high prices, having traded below USD100 per ton from mid-May 2014 to June 2020, with only a brief spike above that level in May and August 2019.

Prices may continue to moderate if China, which buys about 70% of the world's seaborne iron ore, continues to persuade steelmakers to limit production while supply from top exporters Australia and Brazil rises.

However, with Rio Tinto reporting a cash cost of USD1818.50 per ton for free-on-board iron ore at its Western Australian ports, it's clear that even if iron ore continues to lose value, the major miners will be strong cash generators.

DIFFERING PATHS

Mining companies' use of all that cash shows where they anticipate making profits once iron ore demand declines as China's industrialization slows and the country sources more ore from new projects in places such as Guinea's Simandou.

Rio Tinto is still investing in copper, with expansion at its troubled Oyu Tolgoi mine in Mongolia, but the miner has also approved a large investment in lithium, an essential metal for batteries that will be critical in any successful energy transition away from fossil fuels.

The London-based miner announced on July 27, 2021, that it would invest USD2.4 billion in Serbia's Jadar lithium project, with a four-year construction program set to begin in 2022.

The mine will establish Rio as the largest lithium supplier in Europe. It will provide the continent's major carmakers, such as Volkswagen and BMW, with another metal source, which is critical to their plans to transition to electric vehicles.

Fortescue sees a future in new energies as well but believes hydrogen will be the winner.

The miner has signed several agreements to explore hydrogen projects in India, Brazil, Africa, and Australia's island state Tasmania.

Fortescue's focus is on producing green hydrogen, primarily through hydropower, and then use the resulting hydrogen as a fuel in industrial processes such as steel production. different path than its Australian peers, with a major pending investment in potash.

The world's biggest listed miner is set to decide soon whether to proceed with its USD5.7 billion project to produce agricultural fertilizer in Saskatchewan, Canada.

Potash is an important component of plant nutrition and can make crops more drought-resistant, which is likely to become more critical if climate change alters rainfall patterns worldwide.

BHP's planned foray into potash could be seen as a response to climate change. However, rather than attempting to reduce carbon emissions, as Rio is doing with lithium for batteries and Fortescue with green hydrogen, BHP is looking for a product that will be in higher demand as the world grapples with the effects of climate change.

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