Rio Tinto Following the Downward Trend on Raw Materials

mine-rio-tintoToday Rio Tinto PLC (RTP), the world’s largest mining company, has announced that it stroke an agreement with Nippon Steel on reducing its prices for the ore iron it supplies to the Japanese manufacturer. The price reduction (contractually agreed) amounted to as much as 30% of the previous year’s prices.
Is this good news? The market seemed to think so, since the price incresed with 7% in the hours following the announcement. Naturally, in such a tough environment, when Rio Tinto secures its largest contract, it seems that ensuring a certain volume is good news for the survival of that supplier. Or at least for its cash flow, since it has a certain security that the contractual amounts will pour in the company.
Looking at its financials, one cannot do anything but wonder on the lack of the financial data available for this company. The altest financials talk more about selling financial assets than about the selling of the ore’s. Which is normal for such a diversified group of companies which does not feel obliged to report too much to the SEC:

  FYE Dec-06 HYE Jun-07 HYE Dec-07 FYE Dec-07 HYE Jun-08 HYE Dec-08 FYE Dec-08
YTD Sales of financial assets-IFRS GAAP 293.0 18.0 49.0 49.0 95.0 171.0 171.0
YTD Purchases of financial assets-IFRS GAAP (167.0) (197.0) (273.0) (273.0) (72.0) (288.0) (288.0)
Other financial assets-LT-IFRS GAAP 374.0 647.0 578.0 578.0 690.0 666.0 666.0
Other financial assets-ST-IFRS GAAP 567.0 252.0 1,042.0 1,042.0 774.0 264.0 264.0
Other financial liabilities-ST-IFRS GAAP 193.0 341.0 932.0 932.0 1,141.0 480.0 480.0
Other financial liabilities-LT-IFRS GAAP 233.0 224.0 496.0 496.0 757.0 268.0 268.0
YTD Sales of financial assets-UK GAAP              

 

However, the company has issued some interesting guidance which offers a glimpse on the director’s opinion on its future. On April 4th they agreed to continue the opening of one of their larges mining operations, investing with its joint venture partners in one big coal mine $991 million. The amount of investments was justified in the light of the increased demand from the Asian market manufacturers, probably most of them Chinese. They felt that it was right to do so even if they were pretty advanced with the Nippon Steel negotiations.

Do they foresee an upturn in the raw materials demand? Probably yes, given Rio Tinto’s willingness to sacrifice short term pricing for a long term cash flow. But it could also mean that cash has been once more crowned as a king since they lack it. So the future will tell us if their ambitious investing plan was right or not.

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