What Rio Tinto's Mine Shutdown Means For You
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Clermont, in Queensland, Australia, grew as a mining town that catered to the needs of workers, construction laborers and engineers who worked in the mines nearby. Coal deposits were discovered in 1864 and began to be mined in 1890. The city witnessed impressive growth when Japanese investors and Australian mining authorities worked towards developing the mines surrounding the town.
Rio Tinto's (NYSE: RIO) Blair Athol mine in the vicinity produced an average of 10 million tons of high grade coal per year. But the mine is scheduled to be shut down this December, rising concerns about the future of the town. The news of the closure has not come as a shock to anyone, as Rio Tinto had originally planned to shut it down in 2005. Low grade coal had continued to be dug out until recently, when the company stated that there is no more coal to be tapped. The community in Clermont is worried about their future as it is not clear if the former employees of the mine will stay back or migrate elsewhere en masse. The town depends on the employees of the mines in the area for its survival.
Of the 170 employees and contractors, 30 will be retained at the site to redevelop the mine and to move the infrastructure to Clermont mine, which is being built nearby. The remaining employees and contractors would be assisted in finding employment inside or outside the company as part of the 'My Future Plan' program. Most employees and residents of the town also note that finding an employment will not be a problem as there are other mines in the region. What they do worry about, is the future of the city, which will see a reduction in population if the former employees migrate to other communities.
If one compares Rio Tinto with its competitors, the planned cuts and layoffs are not very drastic. Employee-friendly policies such as "My Future Plan" will help Rio Tinto to maintain its image as a credible and reliable employer. The company has also expressed optimism about its operations in the Clermont Mine, which is still being built. Trains, stockpiles and other infrastructure will be used at the Clermont Mine. It is quite possible that the employees at Blair Athol would be recruited at the Clermont Mine. This would in turn make sure that those employees continue to remain in the same community, without having to relocate to a different one.
Reduced demand for its coal, shutting down mines and laying-off of employees do not really indicate investor confidence but Rio Tinto is still one of the most stable mining companies in the world. The company still has a dividend yield of 2.9% and a net debt of $7.6 billion pounds. With a market cap of $45 billion pounds, Rio Tinto is probably one of the strongest mining companies in the world. One must remember that the company was founded 139 years ago, and is still one of the most important companies in the world. This longevity and persistence of the company are enough to assure investors of its stability, in spite of short-term setbacks such as closure of mines and reduced demand for iron and coal.
But things have not been going too well for Rio Tinto, especially because of a reduction in the Chinese demand for its coal. The reduced Chinese demand and low market prices caused a 22% reduction in first-half profits, forcing Rio Tinto to wonder if it should spend less money on its new projects in 2013, according to Terry Macalister at The Guardian. He also noted that BHP Billiton (NYSE: BHP) would be cutting $80 billion in capital expenditure. BHP is taking a second look at its project pipeline as an area for making cuts.
Rio Tinto's net earnings fell down by 34% to a disappointing $5.2 billion. This can be attributed to lower prices of metals and minerals and the aforementioned issue of the Chinese economy. The company also had a cash flow of $7.8 billion. Though the earnings have dropped by 34%, Rio Tinto still managed to beat market expectations. Analysts had not expected earnings of $5.2 billion.
It is difficult to ascertain how Rio Tinto will deal with setbacks like this but it is expected that its business in Mozambique and Namibia will help it to stay strong. Rio Tinto's mining profile also includes diamonds and uranium, which add a lot to its revenue. Though market volatility can affect Rio Tinto's earnings and profits, long-term outlook for the company is very encouraging. Being in the business for more than a century, Rio Tinto is one of the more conservative choices to make, when it comes to investing.
Rio Tinto's competitors seem to be troubled by the existing market conditions as well. Silver Wheaton (NYSE: SLW) had disclosed a profit of $148.1 million last year during the second quarter. This year, Silver Wheaton reported only $141.4 million. Barrick Gold (NYSE: ABX) is wary about spending money on new mines. Bloomberg reported that Barrick is studying its options very carefully. Low mineral and metal prices will affect Vale's (NYSE: VALE) earnings as well, and analysts are expecting the company to grapple ahead. But an appreciating U.S. dollar against the Brazilian Real will help Vale.
To conclude, Rio Tinto is faring quite well and is one of the better mining stocks to purchase. In spite of having to shut down one of its oldest mines, and in spite of the volatility of world markets, the company is working towards building infrastructure and consolidating its existing mining assets. Building healthy relationships with employees and making sure that their interests are well protected in times of crises will help Rio Tinto to build a better brand image, which is ultimately good in increasing investor confidence.
jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.