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MINING STOCKS

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Of Note:

QUEENSLAND'S economy comes to grips with the end of the mining boom.

Residents of Queensland's prosperous mining towns fear they could join the unemployment
line and are demanding certainty from Rio Tinto.

The company generates about one-fifth of the economy in Gladstone.

Rio has said full details of job cuts, and project deferrals, may not be sorted out until the first
quarter of next year.


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State economy under threat as mining boom ends

Article from: The Courier-Mail
Tanya Chilcott and Tony Grant-Taylor
December 11, 2008 11:00pm


QUEENSLAND'S economy is under siege and the jobs of thousands of workers are in jeopardy as the state comes to grips with the end of the mining boom.

Rio Tinto has yet to tell its 6300 Queensland employees whether they will be laid off as the mining colossus sheds jobs across the globe.

Entire communities have called for Rio Tinto to make a quick decision on plans for its Queensland operations, which include coal mines, alumina plants and power stations.

But the State Government also faces an anxious wait, fearing an effect on Queensland's bottom line.

The reliance on mining royalties means hopes of avoiding financial pain hinge on the resources sector.

The state had already downsized its forecast revenue before the Rio Tinto decision but it is still hoping to reap $2.8billion from coal royalties next financial year.

"It really confirms our view, as a government, that we need to batten down the hatches, that 2009 will be tough," Treasurer Andrew Fraser said.

Prime Minister Kevin Rudd has pledged "whatever it takes" to ensure Australia's economy is not further eroded by the global conditions.

The national unemployment rate rose to 4.4 per cent in November, up from 4.3 per cent, and economists warn that worse is to come.

Residents of Queensland's prosperous mining towns fear they could join the unemployment line and are demanding certainty from Rio Tinto.

The company generates about one-fifth of the economy in Gladstone and local MP Liz Cunningham said the community was facing its "biggest challenge in recent times".

"I would ask people not to panic until Rio clarifies exactly which sectors of their business are going to be affected," she said. "But I would ask Rio to clarify as quickly as possible any job impacts here in the Gladstone region."

Rio has said full details of job cuts, and project deferrals, may not be sorted out until the first quarter of next year.

But analysts believe most Queenslanders will survive Rio Tinto's decision to cut 14,000 from its global workforce.

Rio has a significant head count in Brisbane of Rio Tinto Coal Australia and Rio Tinto Alcan staff. But the majority of its employees are at its operations - from its Weipa bauxite mines on Cape York to its aluminium refining and smelting operations in Gladstone and coal mines in the Bowen Basin.

http://www.news.com.au/common/imagedata/0,,6395533,00.jpg

http://www.news.com.au/couriermail/story/0,23739,24787743-3122,00.html
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Miners spiral towards disaster

Article from: The Courier-Mail
Terry McCrann
December 10, 2008 11:00pm

AFTER the ecstasy comes the agony. Barely six months ago Australian resource stocks were riding at their very highest on the commodities boom. Now the shutters are going up.

The "good" news late yesterday came from Rio Tinto. It's only slashing and burning, to a hopefully still-prosperous future down the yellowbrick road and over the Chinese rainbow.

In contrast, the "Wizards" of OZ Minerals effectively announced that company's liquidation. It "hopes" to self-liquidate, by selling itself off piece by painful piece.

It's got two chances of success and the first has a name. Buckleys.

Oh how dramatically the world has turned. In mid-May the Rio share price was just shy of $160 and its CEO Tom Albanese was, Oliver Twist style, demanding more.

Now it has told shareholders that it is going to slash new capital spending by nearly three quarters in 2009, and go to zero in 2010. It's also slicing 14,000 "roles" otherwise known as jobs.

It would probably go to zero on new projects immediately but for sunk expenditure which makes it better to complete even if you then have to immediately mothball.

Now it's committed to reduce its mammoth $US39 billion debt burden by $US10 billion over 2009 – that's $A60 billion down to $A45 billion.

On the one hand, that looks ambitious as it only managed to cut debt by $US6 billion in the much better environment of 2008 (so far). At least, much better until around September.

On the other hand, it's likely to be much more "realistic" about what it can sell assets for. Nothing better focuses the corporate mind at the moment than approaching debt expiries.

Unless Rio gets its debt down sharply, it could quite literally be in the hands of its bankers in less than a year. That of course is an extreme possibility.

But what an extraordinary shift for a company that was rolling in money. Indeed, right now is STILL rolling in money thanks to those sky-high prices being paid for its iron ore.

Very temporary high prices, though. They WILL fall and fall big time on the contractual roll-over at April. They MIGHT fall, and fall significantly, in less than a month if Rio bows to Chinese demands. Rio provided a sensitivity table which showed a 10 per cent fall in the iron ore price would knock $US1.04 billion off its profit.

As it's highly likely, the price fall could be greater than 50 per cent, the coming lost profit could be something bigger than $US5 billion. Just from iron ore.

And then there's aluminium. Each 10 per cent fall in the aluminium price costs $US800 million of profit.

Each 10 per cent fall in the copper price just shy of $US400 million.

Rio in microcosm captures the race the entire world is now in. Between the possibility of a real and sustained China-slowdown pointed to by Reserve Bank governor Glenn Stevens. And the massive global fiscal and monetary stimulus.

It's a race of course of acute importance to Australia. China slows and we will get very cheap petrol. We will also have the underpinnings of our national prosperity swept away.

How this race plays out will determine whether Rio was still being far too optimistic yesterday. Or whether it outlined a realistic challenge and effective response to it.

Yes, it's going to hold dividends, but no longer increase them. But will even that be possible? SHOULD it be where directors are thinking?

Profit-wise Rio is on a knife-edge. The very thing that it presented as the key point of value differentiation to BHP Billiton, is now a dagger pointed at its heart. Its Pilbara iron ore production capacity.

At the end of the year it will be 220 million tonnes a year. Rio is anticipating shipments next year around 200 million tonnes.

That, though, would represent a significant lift on this year's 170 million-175 million tonnes of shipments. What if it falls, not exactly unlikely, into a global recession?

This leaves it exposed to withering competition from others chasing sales, and/or too much expansion sunk cost not earning income.

If China slows as much as Stevens thinks is possible, all these numbers will come to look as desirable in six months' time as those numbers six months ago look now.

The fall of OZ Minerals is even more spectacular and in its case, terminal.

In March it looked like a merger made in a miner's heaven. Zinifex with $1.2 billion of net cash joining Oxiana with its very promising suite of resource assets.

The merged group started with $1 billion of net cash. It's now got just under $800 million of net debt.

An extraordinary $1.8 billion turnaround and with virtually nothing of real value to show for it.

It's negotiating to sell off its most prospective assets. At a time when commodity prices have plunged and a buyer's cash is king. A dreadful double-whammy for a desperate seller.

If it "succeeds" it will be left with a still-large pile of debt and not much of anything to generate revenue – far less profit. If it doesn't, it goes to the knackery.

http://www.news.com.au/couriermail/story/0,23739,24782941-3122,00.html
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