By Kishori Krishnan Exclusive To Gold Investing News
The numbers have come in. Treading gingerly but showing the way, Rio Tinto, the international mining group that combines Rio Tinto plc, listed on the London Stock Exchange and Rio Tinto Limited, listed on the Australian Stock Exchange, has reported a pre-tax profit of US$ 7.86 billion for 2009, down 14 per cent on the US$ 9.18 billion it made in 2008.
The company, which has reported an increase in copper and gold production, beat analyst expectations as demand for commodities surged in China and India. The results also cap a turbulent year with what some analysts have called a turnaround.
On Thursday, the stock was one of the best performers in the FTSE 100, up 95.5p or 3.04 per cent to 3,235p. The company said it had made $2.6 billion of cost cuts in 2009, £1 billion of which came within aluminum production.
Though the group reported a fall in underlying earnings in 2009 - including a 31 per cent fall in earnings from its largest division, iron ore - down to $6.3 billion from $10.3 billion in 2008, and cut its final dividend by nearly 20 per cent last year, the results were more positive than what was forecast by analysts.
The Anglo-Australian Rio Tinto has been in the news recently after China formally charged four of its employees - an Australian executive and three Chinese nationals - with bribery and stealing state secrets.
The employees were arrested in July and have been detained ever since, creating friction between the Australian and Chinese authorities.
On Wednesday, four Rio workers were indicted in China. No date has been announced for the trial, but a Chinese court official said it could begin by the end of February at the earliest.
If convicted, they could each face up to 27 years in prison.
The mining major’s strong results was enough to power the share price in the mining sector. The world’s third-largest mining company led basic resources shares higher. Xstrata Plc and Anglo American Plc both rose more than 2 per cent.
Xstrata, the largest exporter of coal used for power, rallied 2.9 per cent to 1,042 pence. Anglo American, a diversified mining company, increased 2.6 per cent to 2,387.5 pence.
It may be recalled that on February 2 too, Rio Tinto, Xstrata, and Anglo American were all in positive territory and, collectively, managed to drag the FTSE 100 index into the blue, despite losses elsewhere.
On that day, Rio Tinto also announced that it had completed the sale of parts of its Alcan packaging business to Amcor in Australia for $1.95 billion.
On Thursday, the company reinstated the payment of a dividend after swinging to a second-half profit as prices increased because of the global economic recovery.
Speaking to WSJ, chairman Jan du Plessis said: “We believe that the factors that drove price recovery in 2009 will continue through 2010. We expect that China will grow at over 9 per cent and the emergence of the OECD from recession will provide further support.”
A mix of US$ 7.2 billion of asset sales and a US$ 15.2 billion rights issue has helped the firm reduce its net debt to US$ 18.9 billion.
UK-registered China operating copper and gold miner Central China Goldfields (AIM: GGG), and Uzbekistan focused gold miner Oxus Gold (AIM: OXS), both rose 4.5 per cent.
Australian gold and copper prospector Solomon Gold (AIM: SOLG) and Fiji focused gold miner Vatukoula Gold Mines (AIM: VGM) were up 4 per cent each.
Gold miners rallied Wednesday too on the TSX. Shares of American Bonanza Gold (TSX:BZA) gained three cents, or 19 per cent, to close at 19 cents, a two-year high, after touching 22 cents during the session.
What prompted the high? The company released a feasibility study for its Copperstone gold project in Arizona, with a pricetag of US$ 17.7 million to put the mine into production.
Shares of Rubicon Minerals too added 22 cents, or 4.8 per cent, to $4.81 after the company drilled 20.7 grams per tonne of gold over 14.3 metres in the F2 gold zone of its Phoenix project in Ontario’s Red Lake camp.
Gold miners are responding to the bullion’s rising price by upping production.
In December the world’s biggest miner Barrick Gold, said its output should continue to trend higher past 2010, while number two gold miner Newmont Mining said it sees output climbing 5-10 per cent this year.
“High prices have massively incentivized additional exploration, and there are a lot of new gold mines coming on stream,” said Natixis analyst Nic Brown. “We see supply increasingly substantially in the immediate years ahead.”
On Thursday, Dow Jones Newswires reported that European stocks were higher amid hopes that a meeting of European leaders would result in a bailout plan for Greece. Initial concerns over Greece’s debt problems seemed to be abating.
“Fears of a global debt crisis are overdone,” Credit Suisse said in a note. While it was negative on countries such as Greece, Spain, Ireland and Portugal, the brokerage highlighted the fact that they only account for 14 per cent of the European Union economy.
So, not to worry.
On Thursday morning, the price of gold edged higher for a third session, as markets digested news that the European Union had agreed to an aid package for debt-laden Greece.
April gold was up $9.00 to $1,085.30 an ounce.
And if gold has managed to keep afloat above $1,075, but not much above $1,080-$1,084, the yellow metal is vulnerable to fresh speculative selling, analysts state.
In recent months, gold has been trading as a risk play, so the debt concerns of the 16-nation euro bloc have emerged as a driver for gold prices.
The biggest threat to rising gold prices appears to be the substantial decrease in long positions in paper markets, Alan Heap, an analyst at Citi Investment Research, writes in his report: “Positions held by money managers and broader non-commercial positions have fallen since November 2009, when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years.”
Point to note: There is a significant upside risk to prices. Currency devaluation based on lingering instability in the financial markets is set to see interest in gold rise as an alternative store of value. Gold will also get a boost from possible physical buying. After all, Valentine’s Day is around the corner, as is the Chinese New Year. Happy gifting!