Rio Tinto’s Copper Lining

Includes: BHP, RIO
by: Hard Assets Investor

628 million tonnes.

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

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.


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?

Everest-like fever charts, that's why. Coal in the spot market has been rising steadily, and is much higher than the prices agreed to last year. That rise in price is the main reason that Vale was able to negotiate 65% and 71% increases for its coal contracts. But BHP and Rio Tinto want more, and they want more flexibility to take advantage of the spot market. If their stock performance is any indication, the coal spot market seems to be treating them well.

Nippon Steel sees the coal negotiations with Rio Tinto as one of RTP's defenses against BHP, and expects the negotiations to continue to drag on.

What's The Big Deal? Any Deal?

China is rumored to be actively trying to influence the BHP/RT deal - or should that be to stop the deal? These rumors insinuated that BHP may be the target of a raid by Chinese interests in order gain enough shares to stop the acquisition. China is already having difficulties negotiating coal contracts with BHP and Rio Tinto - a combined entity would put China at that much more of a disadvantage in future negotiations.

But here's the problem: The longer this deal takes to close, the less likely it will close. And this deal has been dragging on for a long time. Rio Tinto believes that BHP's latest offer of 3.4 shares for every 1 of RTP's is too low. And they are actively campaigning on that idea, touting the new copper resource upgrade as well as any other positive news it can get on the street. Assuming BHP raises its offer or Rio Tinto folds and accepts the one on the table now, there are inevitable regulatory concerns and legal complexities that come from both companies being dual-listed. It will be a field day for the lawyer types.

But no matter how you look at it, Rio's hand just keeps getting stronger.