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Rio Keeps Focus On Exploration While Cutting Costs
By Clara Ferreira-Marques
23/08/2013
LONDON (Reuters) - Big miners such as Rio Tinto can slash exploration spending and still make valuable finds but they must resist the temptation to stop searching entirely or they will pay later, the company's head of exploration said.
The secret of successful exploration on a budget, according to Rio's Stephen McIntosh, is prioritisation and planning.
"If something is not making it, we will get out quickly or divest that opportunity, so we can reinvest into something that will be of value to Rio Tinto," McIntosh said.
Total withdrawal from exploration - attractive as it has no impact on current production - could hit earnings in decades to come especially at a time when smaller explorers and miners cannot raise cash to fill the gap left by big players.
"If you stop your most fundamental greenfield exploration, for the majors you won't miss it for a very long time. But you will wake up one day, want to the go to the cupboard of future options and find it a little bit bare," McIntosh said in a telephone interview from Singapore.
Cutting exploration, has proved an easy win for miners under pressure, as prices and demand cool, to reduce costs that ballooned during the boom years.
Exploration typically requires little committed spending, staff can be easily moved and cuts have little immediate impact.
A project can take two decades to develop from the idea of entering a country, to a decision on whether to begin mining.
Virtually all miners have cut back - including Rio, which uncovered giant deposits from Peru to Guinea in the last decade but more than halved spending on exploration in the first half of this year.
It cut $483 million of exploration and evaluation costs in the first six months - more than half its 2013 reduction target - and slowed work at projects including U.S. copper mine Resolution.
McIntosh, a veteran of almost three decades who has worked in 45 countries, said less cash now may not mean fewer finds.
"One of our experiences from the 1980s and 1990s is that when you have a lot of money to invest, people tend to get busy but they are not necessarily busy being successful," he said.
PRIORITISE AND PLAN
"It is much more about how you prioritise and plan."
During the boom years, when miners were chasing volumes at all cost, Rio increased its exploration spending at a fraction of the average rate in the industry.
According to McIntosh, Rio's spending rose 2.5 times between 2004 and 2012, compared with a nine-fold industry-wide increase.
He put that down to an exploration plan, linked to Rio's strategic priorities, that treats its options like a pharmaceutical company would treat its research and development portfolio. Every project phase is separated by a "gate", or a decision on whether it should continue.
Cutbacks so far, he said, have been largely covered by lower prices for outside services and contractors, which have cooled alongside metals demand, as big and small miners ret1reat.
HITTING PAY DIRT
Rio, McIntosh said, has had one of the highest success rates in the industry.
Since 2002, his 500-strong team have found nine "tier one" deposits - projects that have the scale and quality to appeal to a major. These include the Simandou iron ore mine in Guinea, and Resolution, owned with BHP Billiton - both among the world's largest untapped deposits.
Rival BHP has cut virtually all exploration except for copper and oil and gas.
Rio, though, has remained active even in iron ore - a steelmaking ingredient that already accounts for almost 90 percent of its earnings.
Most of the iron ore activity is so-called brownfield - working around an existing operation - often preferred as it is cheaper. But there is also activity outside Rio's core Australian base to keep options open.
"There is just a very small effort to make sure we don't miss a deposit that could be a game changer," McIntosh said.
Like other miners Rio has pushed into increasingly difficult regions to seek the next big deposit - and has continued despite delays and difficult negotiations over its mine in Mongolia and the 2008 revocation of part of its concession in Guinea.
McIntosh said there may be some "hidden" deposits in established locations such as Chile, for copper, that are becoming visible with new technology. But Rio will also keep an eye on developing regions.
This includes Laos, where it is moving towards a discovery, India, where it has made a diamond find, or China, where it has a venture with state-owned miner Chinalco.
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