* Miners prepare for AGMs after share price drop
* Rio Tinto, Anglo meet investors on April 19, others follow
* Oyu Tolgoi technical report shows sharp rise in costs
By Clara Ferreira-Marques and Sonali Paul
LONDON//MELBOURNE - Rio Tinto and other big miners preparing to meet shareholders over the coming weeks will face tough questions over ever larger and more capital intensive projects at a time when robust commodity prices have cooled.
The top mining stocks have had a troubled few weeks, with the UK-listed sector sliding by almost a fifth since the start of February and valuations languishing at almost half their 10-year average, hit by concerns over cooling demand and the cost of an organic growth pipeline totalling some $180 billion.
“Shareholders are desperately concerned about capex inflation. Capex inflation without a concomitant increase in the underlying price of the commodity is not good and at the moment we are seeing commodity prices flat to down,” analyst Des Kilalea at RBC Capital in London said.
“Every time you spend an extra billion, it is an extra billion that isn’t there for potential dividends and the average return on the investment goes down.”
Rio, which meets its London-based investors on April 19, has been in the spotlight over rising costs at Oyu Tolgoi, the flagship Mongolian copper-gold mine that it controls through its majority stake in Ivanhoe Mines.
A 513-page technical report - published two weeks ago by Ivanhoe but not publicised or officially endorsed by Rio - put the capital costs for one of the industry’s most anticipated greenfield projects at $13.2 billion, up from $9.55 billion.
Costs for both the initial phase and the mine’s expansion have risen, with the cost for expansion more than doubling to $5.1 billion.
The news hit Ivanhoe shares, but Rio analysts and investors are more sanguine, given the scale of Rio’s investment to date.
“Whenever there’s a capex blowout and delays, it’s disappointing,” said Jason Beddow, managing director of Argo Investments, a top-10 investor in Rio’s Australian shares.
“But in this environment, if you’re not factoring that most of these projects are going to take longer and cost more, then you’re being optimistic.”
The soaring cost of producing an ounce of gold or a tonne of iron ore has been the reverse side of the commodity boom, with the rising cost of labour, materials and power denting profits.
However, analysts say both Rio and larger rival BHP Billiton have signalled they are listening to shareholder concerns over capex and cost escalation and could phase or stage their spending — for BHP that would mostly affect its U.S. shale gas plans, while for Rio it could mean slower growth in Simandou, Guinea while its focuses on Australian iron ore.
“It seems (Rio are) focusing more in making sure they get the spend in the Pilbara right, which I think is the right place to spend the capital...The Pilbara’s their backyard,” said Michael Bentley, portfolio manager at Northward Capital.
Rio has a projected capital investment of some $20 billion to expand iron ore operations in the Pilbara region of Western Australia from 220 million tonnes to 353 million tonnes by 2015.
BHP, meanwhile, has told shareholders it will be “living within its means”, partly in answer to worries that its four major projects — the Olympic Dam expansion and the Outer Harbour iron ore project in Australia, U.S. shale gas growth and the Jansen potash project in Canada — would mean frenzied spending.
The four “mega projects” will require more than $120 billion of capex over the next 15 years but only increase returns from 2023, according to Deutsche Bank estimates.
“You have got to be certain that the quality of the assets you have are really good and that they are going to earn good long-term returns over 20, 30 years. You have to have the capability and the confidence to keep investing through all cycles, all the way through,” said James Laing, deputy head of UK and European Equities at Aberdeen Asset Managers, a top 10 investor in Rio and BHP.
“There’s a big element of trust and the fact that prices are good at the moment, and these projects stack up quite nicely. When they make these capex plans, they do ask themselves that if prices came back 25 or 50 percent, will these projects still be viable?”
Anglo American’s shareholders will also meet next Thursday, with concerns set to focus around its own high-profile growth project, the Minas Rio iron ore operation in Brazil, where licenses remain a concern, and around a legal battle with Chile’s Codelco over key assets there.
Anglo could also face questions over its future, as it has been repeatedly named as a potential target for an enlarged Glencore-Xstrata , after the commodities trader and miner complete their merger later this year.