Rio Tinto Investment Opportunity In Afghanistan - Free Essay Example

Rio Tinto plc and Rio Tinto Limited (collectively known as Rio Tinto), operating as a single business organization, is engaged in international mining group which encompasses exploring for, mining, and processing the earths mineral resources. The group offers products which include aluminum, copper, diamonds, energy products (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, and talc), and iron ore. The group has global operations with significant businesses in Australia, North America, South America, Asia, Europe, and South Africa. Rio Tinto operates through six business groups: aluminum; copper; diamonds and minerals; energy; iron ore; and other operations. The company recorded revenues of $41,825 million during the financial year ended December 2009 (FY2009), a decrease of 22.9% compared with FY2008. The operating profit of the company was $5,920 million during FY2009, a decrease of 20.8% compared with FY2008. The net profit was $4,872 million in FY2009, an increase of 32.5% over FY2008. Though it is said to be successful in most of the parts of world, it required a big change in the cultural environment and strategic approach. Several questions bothered the Rio Tinto such as: Whether the company should look at opportunity in Afghanistan ? Would exploration of copper in china beneficial with chinalcos strategic partnership? as a consultant out of U21G I have been assigned with the task of working out the strategic approaches of Rio Tinto weather to enter in to Afghanistan with challenges or enter in China with JV of Chinalco. Key Drivers Challenges for foreign investment in extractive industries Mineral endowments provide opportunities for economic development and poverty alleviation in the counties where they are located. Supply of minerals is essential for economic development; no modern economy can function without adequate, affordable and secure access to these raw materials. The cost of exploiting new mineral deposits are likely to rise, which might keep prices at relatively high levels in the coming years The high prices have spurred an investment boom in mineral exploration and extraction. Challenges Global mineral markets are characterized by an uneven geographical distribution of reserves, production and consumption. Developing and transition economies are among main producers and net exporters of various minerals, these imbalances can create concerns among importing countries over the security of supply, and concerns among exporting countries over market access. Extractive activities, regardless of who undertakes them, involve environmental c osts. The quality of government policies and institutions is a determining factor for ensuring sustainable development gains from resource extraction. Source : UNCTAD The evolution of policy approaches towards foreign investment Technological, Research Development trends in extractive industries Technology Seismic prospecting and remote-sensing satellites are the new technologies to search for the potential minerals. New technology such as nanotechnology is introduced to detect gases. Research Mining equipment and its automation. Material man transport related research. Mine Design , speacially focusing deep , high-wall and long-wall mines Methods on Innovative mining. Development Mine heating and cooling ventilation. Fire suppression and prevention. Machine Safety and Ergonomics. Emission monitoring and control on diesel engines. Research Policies Regulatory frameworks in Afghanistan. 1. According to the Afghan constitution, article nine, the government of Afghanistan owns mines and other natural resources. 2 Ministry of Mines as a key sectoral ministry is currently Involved in the research, exploration, development, exploitation, and processing of minerals and hydrocarbons, 3 Ministry is also responsible for protection of ownership, transportation and marketing of those resources in accordance to the countries new Laws (Minerals and Hydrocarbons). 4 The long term vision of the Ministry is the creation of an effective administration, utilization of natural resources, creation of jobs, the encouragement of private investment in the mining and hydrocarbon sectors, and increasing government revenue. 5 Holders of Mineral Rights have rights to foreign exchange and international banking provisions, provided that they have paid all applicable taxes, duties and other charges. 6 State guarantees provide for companies to organize their operations as they se e fit, and to have access to raw materials, markets for goods and services, and sale of products 7 The Ministry of Mines provides assurances of protection against financial consequences of legislation which becomes effective after issuance of the Mineral Right. 8 The Ministry of Mines will adhere to standards regarding transparency within the extractive industries. Analysis based on OLI Framework. OLI analysis for the following challenges in the Afghanistan market Ownership Advantages : Private sector can acquire significant land holdings for exploration and/or exploitation The Ministry of Mines provides assurances of protection against financial consequences of legislation which becomes effective after issuance of the Mineral Right. Location Advantages : There are no location advantages , as currently Afghanistan has very poor infrastructure , which will take at least another 5 years to build , and also there is not sea port to its borders. Crime, theft and disorder, electricity are major issues in the location. International Advantage: As no other international player has entered Afghanistan , there is a good opportunity for long term investment. Afghanistan has enacted a modern secured transactions law which makes it easier for businesses to secure a loan. Key Success Factors. Improve companys position on the global cost curve of aluminium assets. Exploration of copper with a partnership with china. Analysis based on Porters Five Forces. Barriers to entry Afghanistan needs a good infrastructure No Skilled labour government Laws are still not clear and very new. Afghanistan has a major culture barrier Terrorism , crime theft are major issues in country Threat of substitutes Infrastructure has to be build to start the business. Initial business will have great risk Bargaining power of buyers Time to export goods is very high Cost of export is very, as no adequate infrastructure. Bargaining power of suppliers Very few options for suppliers No other MNC has setup business in the country Rivalry among the existing players Alcoa Inc Anglo American plc. Barrick Gold Corporation BHP Billiton Group SWOT Analysis with strategies in China Strengths Extensive global presence : Rio Tinto has a geographically diversified its revenue base. Over a period of time the company has developed diverse revenue streams and is not dependent on any one market. Extensive global presence coupled with geographically diversified revenue base protects the group from fall in demand of any one country or region and reduces its business risk. Extensive business lines : Rio Tinto group is organized into five geographically based teams in North America, South America, Australia, Asia, and Africa/Europe; and a sixth project generation team that searches the world for new opportunities and provides geological, geophysical, and commercial expertise to the regional teams. Rio Tintos extensive business line helps the company in diversifying its business risk. Weaknesses High debt: Rio Tinto has a significant amount of debt. Net debt at the end of FY2009 stood at $18.9 billion. Although the group has reduced its net debt from $38.7 billion in FY2008, it is still substantial. This substantial debt could limit its ability to obtain additional financing to operate its business. Further, it would make it difficult for the group to satisfy its obligations including making interest payments on debt obligations. High debt could also limit Rio Tintos capital expenditure. The group requires substantial capital to invest in greenfield and brownfield projects, and to extend the life and capacity of its existing operations ,high debt, the group could be forced to reduce its capital expenditure further, which may negatively impact the timing of its growth and future prospects. Pension obligations: Certain of Rio Tintos businesses sponsor defined benefit pension plans. As at 31 December 2009, the group had estimated pension liabilities of $16.2 billion and assets of $12.4 billion. After excluding those pension arrangements deliberately operated as unfunded arrangements, representing liabilities of $1.1 billion, the global funding level for pension liabilities was approximately 82%. If the funding level materially deteriorates further, cash contributions from the group may be needed, pressurizing the liquidity position of Rio Tinto. Opportunities Growth prospect of the Chinese economy: The effect of the Chinese Governments monetary stimulus package recovery has resulted in Chinas gross domestic product (GDP) recording strong growth in the second half of 2009. Actual growth during the period surpassed 8%. The improvements that the company recorded in its financial performance during the second half of FY2009 were primarily driven by this stronger Chinese GDP growth and its attendant effects on Chinese construction and infrastructure development. It is expected that strong growth of the Chinese GDP will continue through 2010 as the country continues to urbanize and industrialize. China is expected to be the key driver for the mining industry in the future, with exponential growth of Chinas demand for iron ore, copper, coal, and aluminum to continue over the next 15 years as the average wealth of many millions of people increases. An important objective of Rio Tinto for FY2010 is to strengthen its relationship with China , the most important destination for the groups products and the largest contributor to its total revenues (China is Rio Tintos largest geographical market, accounting for 24.3% of the total revenues in FY2009). Continued improvement of the Chinese economy provides Rio Tinto with the largest source of short term demand growth. Strategic divestitures to reduce debt: Rio Tinto has made several strategic divestitures. For instance, in February 2009, Rio Tinto completed the sale of its undeveloped potash assets to Vale, the Brazilian mining company, for a cash consideration of $850 million. Additionally, in March 2009, Rio Tinto signed a sale and purchase agreement to sell its Jacobs Ranch coal mine to Arch Coal (a coal producer) for a total cash consideration of $761 million. In September 2009, Rio Tinto completed the sale of its Corumba iron ore mine in Brazil and the associated river logistics operations to Vale for a $750 million. In December 2009, Rio Tinto completed the sale of Alcan Composites, part of the Alcan engineered products division, to Schweiter Technologies for $349 million. Such strategic divestitures made by Rio Tinto could help the group to reduce its substantial debt. Threats Uncertainty regarding commodity prices and global demand: Commodity prices and demand for Rio Tintos products are cyclical and strongly influenced by world economic growth. This is particularly so for the groups key customers, especially in the US and Asia. There is potential volatility in short to medium term commodity prices as various national stimulus packages are reduced. Muted consumer spending may result from concerns over unemployment. The groups normal policy is to sell its products at prevailing market prices and not to enter into price hedging arrangements. The recent improvement in commodity prices and demand for the groups products may not remain as strong, which would have an adverse impact on Rio Tintos revenues, earnings, cash flows, and growth. Regulations:Rio Tinto operates in an industry that is subject to numerous health, safety, and environmental laws, regulations, and standards. The group is subject to extensive governmental regulations in all jurisdictions in which it operates. Operations are subject to general and specific regulations governing mining and processing, land tenure and use, environmental requirements (including site specific environmental licenses, permits, and statutory authorizations), workplace health and safety, social impacts, trade and export, corporations, competition, access to infrastructure, foreign investment, and taxation. Some operations are conducted under specific agreements with respective governments and associated acts of parliament but unilateral variations could diminish or even remove such rights. Evolving regulatory standards can result in increased litigation and/or increased costs, all of which can have an adverse effect on Rio Tintos earnings and cash flows. Risk associated with fluctuations in exchange rates:Rio Tinto is exposed to fluctuations in exchange rates. The majority of the groups sales are denominated in US dollars. The group also finances its operations and holds surplus cash pri marily in US dollars. Given the dominant role of the US dollar in the groups operations, it is the currency in which its results are presented both internally and externally. The group also incurs costs in US dollars but significant costs are influenced by the local currencies of the territories in which its ore reserves and other assets are located. These currencies are principally the Australian dollar, Canadian dollar, and Euro. The groups normal policy is not to enter into hedging arrangements relating to changes or fluctuations in foreign exchange rates. As a result, if there is an appreciation in the value of these currencies against the US dollar or prolonged periods of exchange rate volatility, these changes may have a negative impact on the groups results of operations. Conclusion Action Plan: With all its experiences in the field of exploration Rio Tinto is capable of expanding its business in Afghanistan and China . It needs to carry out proper CAGE analysis and SWOT analysis to decide about the right strategies to be adopted. With proper understanding on the cultural environment and adopting the right product marketing strategies Grupo Bimbo can grow in Brazil and China to strengthen its global presence. In this case analysis we presented how the challenges in Brazil and US can be addressed by the Grupo Bimbo using the analytical tools. Based on the analysis, we recommend that GB can enter in to both China and Brazilian market with different strategic approaches given in the case analysis.