Signs of cooling demand for commodities from China have not deterred Rio Tinto from sticking with its plans to boost iron ore production in its annual production forecast, though plans for a few other commodities have been trimmed.
Rio Tinto plc (NYSE:RIO) (ASX:RIO) (LON:RIO) confirmed that its expansion of Western Australian iron ore operations was proceeding on track, and that its guidance of 250 million metric tons production of iron ore was intact.
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Analysts are increasingly looking askance at miners bankrolling huge expansions even though questions arise on the likely demand given the European crisis, and the slowing Chinese economy. With prices significantly off last year’s highs, miners’ results are expected to be under a cloud.
Rio Tinto Chief Executive, Tom Albanese, claims that “Our tier-one projects are robust under any probable macroeconomic scenario,” which is significant, and indicates the solidity of the company’s understanding of the global demand nuances. It plans to spend another $3.7 billion in the coming years on expanding iron ore production capacity.
Rival Fortescue Metals Group Limited (ASX:FMG) is also comfortable with current iron ore prices, saying they are remunerative even after the recent fall. In fact, it managed to sell a record 17.8 million tons of iron ore in the second quarter.
The miners may be having their numbers right. According to analysts at Canaccord Genuity in London, “Once through the current steel destocking phase, we are likely to see iron-ore prices move upwards as mills restart operations and ensure they have the inventory to cover rising order books.”
But concern mounts over the mounting debt levels that the companies are taking on – more so, as in the case of Fortescue, who has a massive cost overrun on its hands relating to its iron ore project. The $600 million excess means that the company would have to take recourse to additional funding and debt, while estimates of its peak debt run from $8 to $9 billion.
The higher gearing makes analysts nervous, as the company would be hard put to service the debt in the event of a crash in commodity prices. On the other hand short sellers such as Jim Chanos think iron ore prices could crash below $100 a ton, leaving Fortescue in a precarious position.