fmg forcast $8.33 p/s, page-12

Matt Chambers | July 20, 2009

Article from: The Australian
IRON ore prices have leapt to levels not seen since last year, cushioning Rio Tinto against any financial fallout from its raging diplomatic row with Beijing.


Over the weekend, iron ore spot prices breached $US90 a tonne for the first time in nine months, driven in part by the uncertainty caused by Beijing's crackdown on steelmakers and the jailing of Rio's No2 executive in China.

At the same time, Rio's big iron ore operations in the Pilbara region of Western Australia are in overdrive, producing at record rates and sending more to China than ever before due to the closure of high-cost Chinese mines. Both Rio's shares and iron ore prices have risen more than 10 per cent since July 7, when the arrest of Australian executive Stern Hu and three Chinese employees for alleged bribery and stealing state secrets was revealed.

Investors and analysts do not see the Hu affair as a reason to abandon to Rio. They note that China's demand for iron ore is growing and that Japanese and Korean demand may also be on the rise. Rio is China's biggest individual iron ore supplier with about 25 per cent of the market.

Rio shares closed at $52.48 on Friday, with gains by its London and Australian-listed stock adding $10 billion to its market value. Most analysts see the stock as a more attractive buy than BHP Billiton.

"In the long term, it isn't clear this (the Shanghai detentions) will have a negative effect on Rio, so, from an investment perspective, we are not concerned yet," said one of Rio's top 10 shareholders. "It is also too early to tell how it will play out."

Of the 10 analysts that follow Rio's Australian-listed shares, seven rate them as a buy. By comparison, only six of 17 analysts that cover BHP call it a buy.

Spot iron ore prices monitored by Metal Bulletin and compiled weekly jumped $US4 a tonne to $US91 late on Friday night. It was the fifth straight weekly gain and one that, at current freight rates from Australia to China of about $US14 a tonne, put spot prices midway between 2009 contract prices negotiated by Rio with non-Chinese customers and the record 2008 prices. Traders reportedly said there was little Australian spot iron ore available, which supported price gains.

While freight rate movements this month indicate there could have been some slowing in sales from Australia, the lack of spot iron ore could also be because sales have been diverted to Chinese mills that have agreed to accept provisional prices on iron ore -- in line with the 33 per cent cut accepted by Japanese and Korean mills.

Rio, which according to Macquarie Group sold 86 per cent of its iron ore to China in the first half of this year, last week said it continued to sell high levels of iron ore to China.

"Clearly, Rio has sold aggressively into China," Austock analyst Tim Gerrard said last week. "Its sales will almost certainly be backed by letters of credit, suggesting its customers are the major players."

Also in Rio's favour is data suggesting non-Chinese demand is slowly returning. Macquarie says June iron ore exports to countries other than China from Australia and Brazil doubled from the previous four months.

"If the recovery continues, and this is exactly what we are hearing, then we would expect Brazilian and Australian suppliers to ship less to China in the second half than the first, requiring a reopening of high-cost domestic Chinese iron ore mines to meet demand," Macquarie said.