Most of the changes will take place in the company’s Kitimat smelter in British Columbia, an ongoing USD2.5 billion modernization project that will increase of the smelter’s production capacity by more than 48 percent to approximately 420,000 tonnes per year.

The modernized Kitimat smelter will be powered exclusively by hydroelectricity and the AP technology will reduce emissions intensity by more than 50 percent annually. This is yet another initiative that Rio Tinto has taken to bring its aluminum business up to par with the rest of its operations. 

Rio Tinto is one of the world’s largest mining companies and the second-largest producer of seaborne iron ore and a major producer of copper, coal and aluminum. It is a producer of diamonds and gold, and it also has industrial mineral interests, primarily borates and titanium dioxide feedstock.

Given the company’s strong performance in all of the segments in which it operates, the lagging performance of the aluminum division has been a thorn in its side. Rio Tinto’s stated long-term goal is to become a low-cost producer for each commodity in its product portfolio.

Overall Rio Tinto has USD27 billion worth of projects underway and the company’s capital expenditures (capex) for next year are projected to come in at about USD14 billion. The majority of capex is expected to be focused on iron ore, as the company lifts production from its mines across the globe.

The company’s cash flows are strong, and its net-debt-to-equity ratio is a manageable 12.7 percent. Consequently, we believe that financing these projects won’t be a burden for Rio Tinto. If these projects are successful, Rio Tinto’s stock should react positively.  

That being said, the company has been successfully executing on key growth projects such as the Oyu Tolgoi (OT) in Mongolia. Oyu Tolgoi is one of the largest undeveloped copper mines in the world with some 37 million tonnes of copper. The estimated capex for the mine is USD5 billion, with copper production ramping up to about 700,000 tonnes per year and gold production ramping up to 675,000 ounces per year.

Rio Tinto’s main partner for the project has been Canada’s Ivanhoe mines, although Rio Tinto has now assumed all operational responsibilities. But the company has been in intense negotiations to take total control of the mine, as Rio Tinto already controls 49 percent of Ivanhoe’s shares.

An arbitrator recently ruled that Rio Tinto can acquire shares in Ivanhoe at will, starting at the end of January 2012. This ruling cannot be appealed. Although Rio Tinto has downplayed the development, it’s a significant victory for the company.

That being said, OT will only account for 1 percent to 2 percent of Rio Tinto’s earnings, although this figure may eventually grow to 3 percent. But these numbers don’t tell the whole story. The project has given Rio Tinto the opportunity to become a player in Mongolia–a country that is home to some of the world’s largest untapped resources. Furthermore, Mongolia’s proximity to China and the rest of Asia makes its potential even greater. Once OT begins production next year, much of the uncertainty regarding its viability should abate and benefit Rio Tinto’s stock price.

Rio Tinto’s balance sheet remains strong. The company has been steadily reducing its debt and is also in the process of completing a USD7 billion share buyback program. Its return on equity stands at about 25 percent, and the stock trades at an undemanding valuation of 1.8 times book value.

It’s true that the fragility of the global economy in 2012 makes trading in metal stocks volatile. For that reason, investors should exercise caution and hedge their portfolios. But on an operational level, the current commodity cycle remains strong. That’s why companies such as Rio Tinto have been able to spend on projects, deleverage, increase dividends and buy back stock. Rio Tinto is a buy up to USD60.

Source: Rio Tinto