M&As good, big discoveries better says Rio Tinto boss

IN 1996 Rio Tinto geologist Derek Stonley hitched his pack over his shoulders and started out on what would be a three-week hike into the interior highlands of Guinea in West Africa, tempted by the siren song of 50-year-old French colonial reports of iron showings. It wasn't a great time to be looking for iron ore. The world was awash with minerals, the Asian financial crisis was on the horizon and China's latent boom was mired in memories of the Tiananmen Square massacre. But Stonley trudged on into the Simandou mountain range and found that the French were right. Very right. Based on Stonley's reconnaissance, Rio in 1997 approved one of the more challenging exploration efforts in the global mining giant's history with initial drilling having to be supplied entirely by helicopter. But it paid off. In 2002 the drills hit long runs of high-grade iron ore and what is now set to be a $6 billion project was born. These are the stories that fire the imagination of Rio chief executive officer Tom Albanese. After all, Albanese, who started out in mining as a geologist, only got into the industry because he figured he could do a lot of rock climbing. But big discoveries aren't just for fun, they are also a prime value driver. "I have a bias towards exploration," Albanese tells The Australian. Albanese is flying the globe, selling to investors the world's biggest ever mining takeover, Rio's debt-fuelled $44 billion bid for Canadian aluminium giant Alcan. But exploration is where his heart is, and for Albanese's money, it is also good business sense. Which is why he is looking to sell over $US10 billion worth of assets to pay down the Alcan debt. The mining world might be fixated on mergers and acquisitions as the commodity price boom and tight construction markets make buying production more attractive than developing it. But that won't always be the case in the long lead time mining game, and it is already changing. The soaring valuations on nickel companies have forced Rio to put off any plans to expand its nickel business through acquisition. The focus is now on its two nickel exploration/development projects at Eagle in the US and Sulawesi in Indonesia. "You can put (into exploration) a certain amount of money per year and not every one of those prospects will win. But if you can get one (significant) discovery per year, and we have had a track record of at least one discovery per year over the last several years, it is very good business." Rio spent $US194 million on exploration and evaluation work in the first six months of this year. By discovery, Albanese means "tier one" opportunities that are big enough to have an impact on a giant like Rio, and can slot into its development schedule. Simandou is one of those. Despite being stuck up a mountain range hundreds of kilometres from the coast in a remote part of restive West African, Simandou is likely get the go-ahead in 2010 as a 70 million tonne a year operation with first production in 2013. That represents more than a third of Rio's current West Australian iron ore output in just one first-stage production project. Back in 1996, there were plenty of doubts within Rio about the wisdom of putting so much exploration effort into a project that will need a 700km rail line and a new deepwater port. But they have been laid to rest by iron ore prices soaring 140 per cent in the last four years. "The market has really moved towards that project," Albanese says, noting that there is further potential along the 100km long exploration range. "We are just tapping the surface of that one. It has as extensive a range as anywhere anywhere else in the world." Albanese's nickel strategy is entirely focused on exploration and greenfield developments, given the way prices have soared. At the time last year when mining rivals Xstrata and CVRD were out buying Canadia nickel giants Falconbridge and Inco respectively, Rio stood on the sidelines shaking its head at the premiums being paid. But then it didn't foresee the extent of the nickel price rally that saw spot prices peak at more than $US24 a pound in May this year. "We didn't think nickel would go to $US20 a pound. That would have been a nice bit of crystal-ball gazing knowledge to have." But now Albanese isn't about to chase the market up. He is going to do it the long way. "Anyone that isn't in nickel, like us, would love to be in nickel right now. But the challenge we face is that the current nickel price is so far above a long-term sustainable price for nickel that to try and buy into it in this market is nowhere near value-creating." In Alaska, where Albanese did his geology training, Rio has put its foot on the massive Pebble copper-gold-molybdenum deposit held by Canadian explorer Northern Dynasty Minerals. Earlier this year, Rio increased its stake in Dynasty to just shy of 20 per cent. And Albanese believes Pebble has the potential to be the best of Rio's future copper projects, including the likes of Oyu Tolgoi in Mongolia and the Resolution project in Arizona.