Rio to appeal $200m Hancock royalty ruling
Confirmation that Rio would appeal the NSW Supreme Court ruling came amid an upbeat set of June quarter results that prompted strong buying of Rio shares late on Tuesday.
NSW Supreme Court Justice David Hammerschlag told Rio in May that it should have been paying royalties to companies controlled by Mrs Rinehart and fellow mining heiress Angela Bennett based on a 43-year-old agreement involving both women's fathers.
Hancock launched the action against Rio despite holding a long-standing iron ore joint venture with Rio in the Pilbara that delivers the vast majority of Hancock's revenue.
Rio said on Tuesday "a notice of intention to appeal has been filed in respect of the court's decision".
Despite the challenge, Rio has set aside $US183 million ($199 million) to cover any liability.
The dispute is separate to another long-running dispute between Hancock and Ms Bennett's company Wright Prospecting over the ownership of lucrative iron ore tenements in the Pilbara.
Hancock Prospecting is the biggest shareholder in Fairfax Media.
The 51.8 million tonnes of iron ore that Rio produced in the June quarter was slightly better than most analysts expected, particularly given recent interruptions from rain and equipment failures. It enabled Rio to maintain its full year guidance of 265 million tonnes of iron ore.
There was also good news from the copper division, which reported that the recent wall collapse at the Kennecott mine in the US would not dent production as much as first thought.
The amount of copper mined will now be 100,000 tonnes less than original guidance, rather than 125,000 tonnes as feared in April.
Rio may also be about to pay more mining tax to the Australian government, after reporting that its effective tax rate this year could be 10 per cent higher than last year because its shield against the mining tax was depreciating.
Arguably, the biggest dilemma facing Rio this year is whether to spend $US5 billion expanding its iron ore mines to take production up to 360 million tonnes per year.
The project has come under scrutiny from investors, who question whether Rio should be spending such large amounts of money during an austerity drive.
On Tuesday, Rio said the expansion to 360 million tonnes was "currently under way" but there was no new commitment to spending and its rhetoric around the expansion was slightly different to before.
Instead of sourcing the extra iron ore from new mines and expansions, Rio said it may also be sourced from "incremental tonnes from further productivity improvement at existing mines".
Frequently Asked Questions about this Article…
Rio Tinto is lodging an appeal against a NSW Supreme Court ruling that it must pay royalties to Hancock Prospecting (controlled by Gina Rinehart) and a third company. The original decision said Rio should have paid royalties under a 43-year-old agreement linked to the families of Rinehart and Angela Bennett.
The court ordered payments close to $200 million. Rio Tinto has set aside US$183 million (about $199 million) to cover any potential liability while it appeals the decision.
The dispute is separate from the long-standing iron ore joint venture Rio has with Hancock Prospecting in the Pilbara, which supplies most of Hancock’s revenue. Despite the legal action, the joint venture relationship continues.
Rio produced 51.8 million tonnes of iron ore in the June quarter, slightly above many analysts' expectations despite disruptions from rain and equipment issues. That result helped Rio maintain its full-year guidance of 265 million tonnes.
Rio said the recent wall collapse at the Kennecott mine in the US will have a smaller impact than initially feared. Copper output is now expected to be 100,000 tonnes less than original guidance, rather than a 125,000-tonne shortfall feared earlier.
Rio flagged that its effective tax rate could be about 10 percentage points higher this year than last, because the tax shield against the mining tax is depreciating. The company also noted potential additional liabilities like the royalty ruling, which it is provisioning for.
Rio is debating whether to spend about US$5 billion to expand iron ore capacity to 360 million tonnes a year. Investors have questioned whether such large spending is appropriate during an austerity period. Rio says the expansion is 'currently under way' but has made no new spending commitment and may also source extra tonnes via productivity gains at existing mines.
Investors should monitor the outcome of Rio’s appeal, any changes to provisions or cash reserves related to the royalty ruling, updates on iron ore and copper production guidance, and final decisions on the 360 million-tonne expansion or alternative productivity measures. These factors can affect Rio’s cash flow, tax position, and capital expenditure plans.
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