Rio Tinto Renewal

Minerals producer Rio Tinto (RIO:  NYSE) has been in the hot seat in recent years as its shareholders have clamored for a reduction in the company’s carbon footprint (among a few other bad habits such as arrogantly destroying cultural and archeological artifacts).  In 2018, the company reported its mining operations had emitted the equivalent of 28.6 million metric tons of carbon dioxide.  Not so bad, but emissions by members of its supply chain totaled 536 million metric tons of carbon dioxide.  Unacceptable say shareholders when Rio Tinto’s competitors such as Glencore and Vale and oil and gas companies such as Shell and BP have started projects to cut emissions all along their supply chains.

Someone in the Rio Tinto board room must have got the message.  In February 2020, the company announced a $98 million investing in a 34 megawatt solar power plant for the Koodaideri iron ore mine in Pilbara, Australia.

As impressive as Rio Tinto’s investment might seem, it pales against the $2.6 billion price tag for the Koodaideri mine that is to go into production late in 2021 and become a critical node in Rio Tinto’s iron production network.  It even has its own rail line to connect the mine to an existing railroad to take.  Certainly a solar power plant should make shareholders happy and as proud of Koodaideri as everyone else in Rio Tinto’s c-suite.

Rio Tinto expects the solar plant to power 100% of its electricity demand for during peak generation periods and as much as 65% of average electricity needs.  A 12 megawatt hour energy storage system will help stabilize power generation.  The plant and storage system are expected to reduce carbon dioxide emissions by 90,000 metric tons per year.

Indeed, known mostly for its prodigious iron ore deposits the Pilbara region in Australia is becoming quite the hub of renewable energy.  The Western Australian Government has granted environmental approval for the first stage of the Asian Renewable Energy Hub that will generate 15 gigawatts from wind and solar installations near Port Hedlund.  It will also feature on the world’s largest renewable hydrogen projects. 

Local users in the Pilbara region will be guaranteed at least 3 gigawatts of the power at affordable rates, but the rest is expected to help ‘green’ up the region’s iron ore exports.  Iron mining and processing operations are to be power by solar and wind projects.  Excess power is to be used for hydrogen production using the electrolysis process.  Some of the hydrogen could be used locally in the iron ore processing plants, but most would be used to produce ‘green’ ammonia for export.  Industry and agriculture are hungry for ammonia and could be quite interested in a carbon-free version.

As a major iron ore producer, most of which goes into steel production, Australia is keenly aware of demand for ‘green’ steel.  Indeed, Swedish steel maker SSAB, iron ore producer LKAB and electric utility Vattenfall have embarked on a joint venture to build and operate a pilot plant for hydrogen-based steel production.  The joint venture claims hydrogen electrolyzer costs are near $450 per kilowatt.  Thus zero-carbon primary steel without coking coal could be produce for $400 per ton.  This could be competitive with existing production using conventional processes and resources.  The joint venture managers claim that lower operating costs balance high capital costs.   

Yet another business effort by a competitor group makes it clear there is keen interest in hydrogen-based technology for iron ore and steel production.  BHP, Fortescue, Anglo American and Hatch Engineering have formed a ‘hydrogen consortium’ to figure out how to mine iron ore and produce steel using ‘green hydrogen.’

It might very well be the prospect of highly sought after ‘green’ steel from competitors that has caught Rio Tinto’s attention and not the noise from its shareholders.  It is also very interesting for Rio Tinto and other iron ore operations in Australia that if coking coal is taken out of the steel making operation in favor of a hydrogen-based process, it would be possible to locate steel production much closer to iron ore reserves.

The entrance of the largest companies in the world in renewable energy and materials production makes it clear that environmentally concerned investors may have to invest in polluters in a period of transition.  Rio Tinto is a good example.  The company is a greenhouse gas emitter, but it is better positioned than most to pony up required capital and better equipped than most to manage large-scale, complex projects. Thus a long position in RIO is a bet on renewal.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.