Monster of Rock: Rio Tinto says Simandou won’t kill Pilbara amid China’s economic woes

Rio Tinto boss Jakob Stausholm has downplayed fears the Simandou mine will flood the iron ore market and become a ‘Pilbara Killer’.

Pic via Getty Images

• Rio Tinto boss Jakob Stausholm downplays fears Simandou will flood iron ore market and become the feared "Pilbara Killer" of urban legend

• World's biggest iron ore exporter delivers a 14% lift in profit to US$5.8bn for the June half year

• Dividends totalling $4.4bn to be thrown to shareholders

Rio Tinto (ASX:RIO) delivered a 14% rise in half-year profit to US$5.8bn, with half of that going out the door to shareholders in a dividend as CEO Jakob Stausholm cut a defiant tone on China, confident the spectre of new supply from the company's 120Mtpa Simandou development with a string of state-owned Chinese companies won't kill demand for Australian iron ore.

Long-dubbed the Pilbara Killer, Rio's latest major development will bring the world's largest untapped high-grade iron ore deposit to market, with its share of the Simfer JV – covering the southern two of four permits at the range and port and rail infrastructure for the remote operation – expected to cost US$6.2bn and contributed 27Mtpa of premium 65% Fe plus product.

With iron ore prices falling and the market stung by a $1.9bn insto selldown in competitor Fortescue (ASX:FMG), prompting a 10.2% loss that crunched the ASX 200 yesterday, concerns about the future prosperity of the Pilbara's world class iron ore region where Rio is the largest player have been rising.

Add a major new source of supply in the mix and some investors fear a poorly composed cocktail could lead to a profit-smashing hangover for iron ore prices.

Stausholm told media on a call post earnings release this morning the falling grades in the Pilbara meant there would be demand for both Simandou and its legacy mines as steelmakers look to optimise blends.

"It is important for the customer to get the grade that optimises their blast furnaces," he said. "Already we see fairly strong demand for IOC fines and pellets (Rio's high grade magnetite operation in Canada).

"It provides optionality and actually provides an opportunity to get more value out of our great production in the Pilbara."

Cautiously optimistic on China

China's property sector has been, to put it simply, awful for a couple years. Historically it delivers upwards of 30% of steel and, by proxy, iron ore demand.

Steel prices recently hit a four-year low, as assessed by MySteel, with benchmark 62% iron ore futures in Singapore dropping below US$100/t yesterday again, well down from over US$140/t at the end of 2023. That said, other factors have been at play, with mills trying to dump non-compliant steel before a regulatory deadline and weather hurting contstruction.

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Chinese steel production has remained above 1Btpa for the past four years, with Stausholm positive other areas of Chinese economic activity like manufacturing and infrastructure have picked up the slack from the traditional property engine room.

He also cautioned that iron ore prices are touching the top end of the cost curve, with swing supply typically coming out at these levels in recent years.

"We actually believe that we have a fairly robust and stable demand from China," Stausholm said on the conference call.

"It is the part of the world where you really see significant expansion still of the industrial sector, of course offset by low demand from property.

"On aggregate the steel mills are running and the demand for iron ore is there, so we're quite ... cautiously optimistic."

Stausholm said people underestimate the steel intensity of the green transition as well.

Flat dividend

While analysts and media try to piece to together the macro picture, Rio's investors have seen an unchanged interim dividend, pocketing US$1.77 per share, equivalent to around $4.44bn Aussie.

It came off US$12.1 billion in EBITDA and US$5.8bn in underlying earnings, slightly up from a year earlier with higher copper prices offsetting a lower iron ore take and higher costs, with C1 costs of US$23.2/t towards the top end of its Pilbara guidance range.

Copper sales were up 15%, with growth at Oyu Tolgoi and Escondida adding to the Anglo-Australian mining giant's coffers.

Underlying EBITDA in the Pilbara fell 10% to US$8.8bn, but copper EBITDA rose a whopping 67% to US$1.8bn, with its margin rising from 43% to 53% from the first half of 2023.

But legacy issues are beginning to rear their heads and could weigh on future earnings if prices for commodities like iron ore and aluminium don't rebound.

Around US$1bn is expected to be spent each year to deal with closure costs at the Gove alumina refinery, Argyle diamond mine and Energy Resources of Australia (ASX:ERA), the company tasked with cleaning up the Ranger uranium deposit in the NT. It also tipped a one-off payment of US$1.2bn into cleaning up a legacy site in France in July.

However, lower discount rates saw Rio reduce its overall rehab liability by US$1.3bn to US$15.9bn.

Originally published as Monster of Rock: Rio Tinto says Simandou won’t kill Pilbara amid China’s economic woes