Thirty-nine consecutive years of profits and dividends is a notable achievement by any standard, yet management at
At Rio’s annual meeting in Toronto, President Patrick James restated his company’s drive to nearly triple annual copper output to 1 billion lbs. and reduce cash costs to
the mid-US40 cents-per-lb. range: “Rio Algom is sharply focused on growth in large-scale deposits that will support low-cost production and move us well down the cost curve — most importantly, growth that will help us generate an average 15% return on shareholders’ equity over the [full price] cycle.”
Key to these objectives are the joint-ventured Antamina copper-zinc project in Peru and the wholly owned Spence copper deposit in Chile. Combined, the two will add some 525 million lbs. copper and 135 million lbs. zinc to the major’s annual output.
Starting in 2002, Antamina will begin churning out an average of 600 million lbs. copper and 350 million lbs. zinc over each of the next 20 years. Cash costs are projected to average US35 cents per lb. copper (net of byproduct credits).
Rio holds a 37.5% interest in the project, with the remainder split between
“This is an important and favourable development,” said James. “It will involve the Japanese smelter pool in the project, as well as potentially establish the Export-Import Bank of Japan as a major player on the financing side.”
Proven and probable reserves at Antamina stand at 494 million tonnes grading 1.3% copper, 1% zinc and 0.03% molybdenum, as well as 12 grams silver per tonne. Mineralization continues at depth, with the total resource pegged at 900 million tonnes.
A revised environmental impact study on the project was approved in February, and engineering, prestripping, road construction and excavation work are advancing as planned.
The partners have so far raised US$600 million of the US$1.26 billion that is required for project debt-financing, and James said negotiations with a select group of import-export agencies for the remainder should conclude by mid-year. (Antamina’s total capital costs are projected at about US$2.35 billion).
The Spence deposit hosts in-pit resources of 305 million tonnes grading 1.1% copper, sufficient to yield 305 million lbs. copper per year over a projected 20-year mine life. Cash costs are expected to fall below US50 cents per lb.
“We expect to project-finance the bulk of [Spence’s] development at a time when the copper market and our balance sheet can best support it,” said James. “We plan to bundle Spence with our debt-free Cerro Colorado asset [in Chile], thereby creating a very attractive financing package.”
As part of an ongoing prefeasibility study, Rio is extracting bulk samples from a 1.1-km-long exploration tunnel completed in the first quarter. Both bio-heap leach and traditional milling and flotation methods will be assessed, with a decision on the most suitable technique anticipated by year-end.
Counteracting any potential concerns for Rio’s ability to finance both projects, James said the company had, as of March 31, $122 million in cash and short-term investments, a current ratio of 2-to-1, and a debt-to-capital ratio of 13%. He also noted that Rio expects to generate $600 million in after-tax cash flow over the next five years and that it has a 5-year, US$500-million revolving line of credit, which safeguards Antamina’s development should weak metal prices persist.
Meanwhile, producing projects are keeping in line with long-term objectives:
- the Cerro Colorado copper in Chile, which was expanded 67% in the second half of 1998, is now producing at a rate of 220 million lbs. copper per year;
- Alumbrera in Argentina is running at full design capacity, with Rio’s share of production expected to top 100 million lbs. copper and 46,000 oz. gold, starting this year; and
- Highland Valley Copper in British Columbia has been placed on indefinite suspension, owing to its high costs compared to current copper prices (see separate report, page 1).
At year-end, Cerro Colorado’s reserves totalled 204 million tonnes grading 1.02% copper, whereas Alumbrera’s stood at 644 million tonnes grading 0.51% copper and 0.62 gram gold per tonne. Rio owns a 100% interest in the former and a 25% interest in the latter.
In 1999, Rio expects to produce 365 million lbs. copper, slightly off from 1998 output of 373 million lbs. Cash costs are expected to decline 8% to US47 cents per lb.
During the first quarter, attributable copper output topped 106 million lbs. and cash costs averaged US48 cents per lb. — up 34% and down 8%, respectively, from the year-ago period. Of this, Cerro Colorado produced 47 million lbs. copper at US49 cents per lb.; Alumbrera contributed 28 million lbs. copper, plus 46,000 oz. gold, at US31 cents per lb. copper; and Highland Valley contributed 31 million lbs. at an unspecified cash cost.
The company also produced 523,000 lbs. uranium, 129,000 tonnes coal and 441,000 lbs. molybdenum.
Net earnings for the quarter were $1 million on revenue of $511 million, compared with $9 million on $447 million in the first three months of 1997. The lower earnings largely reflect a 15% decrease in realized copper prices to US66 cents per lb., whereas the higher revenue is attributed to higher sales from both the metals distribution business and copper operations.
A quarterly dividend of 7 cents per share was declared.
James closed the meeting by assuring shareholders that Rio remains committed to social, environmental and safety issues, as well as economics. He cited the United Nations Educational, Scientific and Cultural Organization’s use of Antamina as a model for reconciling environmental and development needs, and said a similar approach has been adopted at the Nicolet zinc-copper project in Wyoming, where an amended environmental impact statement was completed at the end of 1998.
Be the first to comment on "Rio perseveres in weak market — Quarterly output rises, cash costs fall"