Rio Tinto Investment Opportunity In Afghanistan

Rio Tinto plc and Rio Tinto Limited ( jointly known as Rio Tinto ) , runing as a individual concern organisation, is engaged in international excavation group which encompasses researching for, excavation, and treating the Earth ‘s mineral resources. The group offers merchandises which include aluminium, Cu, diamonds, energy merchandises ( coal and U ) , gold, industrial minerals ( borax, Ti dioxide, salt, and talc ) , and Fe ore. The group has planetary operations with important concerns in Australia, North America, South America, Asia, Europe, and South Africa.

Rio Tinto operates through six concern groups: aluminium ; Cu ; diamonds and minerals ; energy ; iron ore ; and other operations. The company recorded grosss of $ 41,825 million during the fiscal twelvemonth ended December 2009 ( FY2009 ) , a lessening of 22.9 % compared with FY2008. The operating net income of the company was $ 5,920 million during FY2009, a lessening of 20.8 % compared with FY2008. The net net income was $ 4,872 million in FY2009, an addition of 32.5 % over FY2008. Though it is said to be successful in most of the parts of universe, it required a large alteration in the cultural environment and strategic attack. Several inquiries bothered the Rio Tinto such as: Whether the company should look at chance in Afghanistan? Would geographic expedition of Cu in china good with chinalco ‘s strategic partnership? as a adviser out of U21G I have been assigned with the undertaking of working out the strategic attacks of Rio Tinto conditions to come in in to Afghanistan with challenges or enter in China with JV of Chinalco.

Key Drivers & A ; Challenges for foreign investing in extractive industries

Mineral gifts provide chances for economic development and poorness relief in the counties where they are located.

Supply of minerals is indispensable for economic development ; no modern economic system can work without equal, low-cost and unafraid entree to these natural stuffs.

The cost of working new mineral sedimentations are likely to lift, which might maintain monetary values at comparatively high degrees in the coming old ages

The high monetary values have spurred an investing roar in mineral geographic expedition and extraction.

Challenges

Global mineral markets are characterized by an uneven geographical distribution of militias, production and ingestion.

Developing and passage economic systems are among chief manufacturers and net exporters of assorted minerals, these instabilities can make concerns among importing states over the security of supply, and concerns among exporting states over market entree.

Extractive activities, irrespective of who undertakes them, involve environmental costs.

The quality of authorities policies and establishments is a finding factor for guaranting sustainable development additions from resource extraction.

Beginning: UNCTAD

The development of policy attacks towards foreign investing

Technological, Research & A ; Development trends in extractive industries

Technology

Seismic prospecting and remote-sensing orbiters are the new engineerings to seek for the possible minerals.

New engineering such as nanotechnology is introduced to observe gases.

Research

Mining equipment and its mechanization.

Material & A ; adult male conveyance related research.

Mine Design, speacially concentrating deep, high-wall and long-wall mines

Methods on Innovative excavation.

Development

Mine warming and chilling & A ; airing.

Fire suppression and bar.

Machine Safety and Ergonomics.

Emission monitoring and control on Diesel engines.

Research Policies & A ; Regulatory models in Afghanistan.

1. Harmonizing to the Afghan fundamental law, article nine, the authorities of Afghanistan owns mines and other natural resources.

2 Ministry of Mines as a cardinal sectoral ministry is presently Involved in the research, geographic expedition, development, development, and processing of minerals and hydrocarbons,

3 Ministry is besides responsible for protection of ownership, transit and selling of those resources in conformity to the states new Laws ( Minerals and Hydrocarbons ) .

4 The long term vision of the Ministry is the creative activity of an effectual disposal, use of natural resources, creative activity of occupations, the encouragement of private investing in the excavation and hydrocarbon sectors, and increasing authorities gross.

5 Holders of Mineral Rights have rights to foreign exchange and international banking commissariats, provided that they have paid all applicable revenue enhancements, responsibilities and other charges.

6 State warrants provide for companies to form their operations as they see fit, and to hold entree to raw stuffs, markets for goods and services, and sale of merchandises

7 The Ministry of Mines provides confidences of protection against fiscal effects of statute law which becomes effectual after issue of the Mineral Right.

8 The Ministry of Mines will adhere to criterions sing transparence within the extractive industries.

Analysis based on OLI Framework.

OLI analysis for the undermentioned challenges in the Afghanistan market

Ownership Advantages:

– Private sector can get important land retentions for geographic expedition and/or development

– The Ministry of Mines provides confidences of protection against fiscal effects of statute law which becomes effectual after issue of the Mineral Right.

Location Advantages:

– There are no location advantages, as presently Afghanistan has really hapless substructure, which will take at least another 5 old ages to construct, and besides there is non sea port to its boundary lines.

– Crime, larceny and upset, electricity are major issues in the location.

International Advantage:

– As no other international participant has entered Afghanistan, there is a good chance for long term investing.

– Afghanistan has enacted a modern secured minutess jurisprudence which makes it easier for concerns to procure a loan.

Key Success Factors.

– Improve company ‘s place on the planetary cost curve of aluminium assets.

– Exploration of Cu with a partnership with China.

Analysis based on Porter ‘s Five Forces.

Barriers to entry

Afghanistan needs a good substructure

No Skilled labor & A ; authorities Laws are still non clear and really new.

Afghanistan has a major civilization barrier

Terrorism, offense & A ; larceny are major issues in state

Menace of replacements

Infrastructure has to be build to get down the concern.

Initial concern will hold great hazard

Dickering power of purchasers

Time to export goods is really high

Cost of export is really, as no equal substructure.

Dickering power of providers

Very few options for providers

No other MNC has apparatus concern in the state

Competition among the bing participants

Alcoa Inc

Anglo American plc.

Barrick Gold Corporation

BHP Billiton Group

SWOT Analysis with schemes in China

Strengths

Extensive planetary presence: Rio Tinto has a geographically diversified its gross base. Over a period of clip the company has developed diverse gross watercourses and is non dependent on any one market. Extensive planetary presence coupled with geographically diversified gross base protects the group from autumn in demand of any one state or part and reduces its concern hazard.

Extensive concern lines: Rio Tinto group is organized into five geographically based squads in North America, South America, Australia, Asia, and Africa/Europe ; and a 6th undertaking coevals squad that searches the universe for new chances and provides geological, geophysical, and commercial expertness to the regional squads.

Rio Tinto ‘s extended concern line helps the company in diversifying its concern hazard.

Failings

High debt: Rio Tinto has a important sum of debt. Net debt at the terminal of FY2009 stood at $ 18.9 billion. Although the group has reduced its net debt from $ 38.7 billion in FY2008, it is still significant. This significant debt could restrict its ability to obtain extra funding to run its concern. Further, it would do it hard for the group to fulfill its duties including doing involvement payments on debt duties.

High debt could besides restrict Rio Tinto ‘s capital outgo. The group requires significant capital to put in greenfield and brownfield undertakings, and to widen the life and capacity of its bing operations, high debt, the group could be forced to cut down its capital outgo further, which may negatively impact the timing of its growing and future chances.

Pension duties: Certain of Rio Tinto ‘s concerns sponsor defined profit pension programs. As at 31 December 2009, the group had estimated pension liabilities of $ 16.2 billion and assets of $ 12.4 billion. After excepting those pension agreements intentionally operated as unfunded agreements, stand foring liabilities of $ 1.1 billion, the planetary support degree for pension liabilities was about 82 % . If the support degree materially deteriorates farther, hard currency parts from the group may be needed, supercharging the liquidness place of Rio Tinto.

Opportunities

Growth chance of the Chinese economic system: The consequence of the Chinese Government ‘s pecuniary stimulation bundle recovery has resulted in China ‘s gross domestic merchandise ( GDP ) entering strong growing in the 2nd half of 2009. Actual growing during the period surpassed 8 % . The betterments that the company recorded in its fiscal public presentation during the 2nd half of FY2009 were chiefly driven by this stronger Chinese GDP growing and its attendant effects on Chinese building and substructure development.

It is expected that strong growing of the Chinese GDP will go on through 2010 as the state continues to urbanise and industrialise. China is expected to be the cardinal driver for the excavation industry in the hereafter, with exponential growing of China ‘s demand for Fe ore, Cu, coal, and aluminium to go on over the following 15 old ages as the mean wealth of many 1000000s of people additions.

An of import aim of Rio Tinto for FY2010 is to beef up its relationship with China, the most of import finish for the group ‘s merchandises and the largest subscriber to its entire grosss ( China is Rio Tinto ‘s largest geographical market, accounting for 24.3 % of the entire grosss in FY2009 ) . Continued betterment of the Chinese economic system provides Rio Tinto with the largest beginning of short term demand growing.

Strategic divestitures to cut down debt: Rio Tinto has made several strategic divestitures. For case, in February 2009, Rio Tinto completed the sale of its undeveloped potassium hydroxide assets to Vale, the Brazilian excavation company, for a hard currency consideration of $ 850 million. Additionally, in March 2009, Rio Tinto signed a sale and purchase understanding to sell its Jacobs Ranch coal mine to Arch Coal ( a coal manufacturer ) for a entire hard currency consideration of $ 761 million. In September 2009, Rio Tinto completed the sale of its Corumba Fe 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, portion of the Alcan engineered merchandises division, to Schweiter Technologies for $ 349 million.

Such strategic divestitures made by Rio Tinto could assist the group to cut down its significant debt.

Menaces

Uncertainty sing trade good monetary values and planetary demand: Commodity monetary values and demand for Rio Tinto ‘s merchandises are cyclical and strongly influenced by universe economic growing. This is peculiarly so for the group ‘s key clients, particularly in the US and Asia. There is possible volatility in short to medium term trade good monetary values as assorted national stimulation bundles are reduced. Hushed consumer disbursement may ensue from concerns over unemployment. The group ‘s normal policy is to sell its merchandises at predominating market monetary values and non to come in into monetary value fudging agreements. The recent betterment in trade good monetary values and demand for the group ‘s merchandises may non stay as strong, which would hold an inauspicious impact on Rio Tinto ‘s grosss, net incomes, hard currency flows, and growing.

Regulations: Rio Tinto operates in an industry that is capable to legion wellness, safety, and environmental Torahs, ordinances, and criterions. The group is capable to extended governmental ordinances in all legal powers in which it operates. Operationss are capable to general and specific ordinances regulating excavation and processing, land term of office and usage, environmental demands ( including site specific environmental licences, licenses, and statutory mandates ) , workplace wellness and safety, societal impacts, trade and export, corporations, competition, entree to substructure, foreign investing, and revenue enhancement. Some operations are conducted under specific understandings with several authoritiess and associated Acts of the Apostless of parliament but one-sided fluctuations could decrease or even take such rights. Evolving regulative criterions can ensue in increased judicial proceeding and/or increased costs, all of which can hold an inauspicious consequence on Rio Tinto ‘s net incomes and hard currency flows.

Hazard associated with fluctuations in exchange rates: Rio Tinto is exposed to fluctuations in exchange rates. The bulk of the group ‘s gross revenues are denominated in US dollars. The group besides finances its operations and holds excess hard currency chiefly in US dollars. Given the dominant function of the US dollar in the group ‘s operations, it is the currency in which its consequences are presented both internally and externally. The group besides incurs costs in US dollars but important costs are influenced by the local currencies of the districts in which its ore militias and other assets are located. These currencies are chiefly the Australian dollar, Canadian dollar, and Euro.

The group ‘s normal policy is non to come in into fudging agreements associating to alterations or fluctuations in foreign exchange rates. As a consequence, if there is an grasp in the value of these currencies against the US dollar or drawn-out periods of exchange rate volatility, these alterations may hold a negative impact on the group ‘s consequences of operations.

Conclusion & A ; Action Plan:

With all its experiences in the field of geographic expedition Rio Tinto is capable of spread outing its concern in Afghanistan and China. It needs to transport out proper CAGE analysis and SWOT analysis to make up one’s mind about the right schemes to be adopted. With proper understanding on the cultural environment and following the right merchandise selling schemes Grupo Bimbo can turn in Brazil and China to beef up its planetary presence. In this instance analysis we presented how the challenges in Brazil and US can be addressed by the Grupo Bimbo utilizing the analytical tools. Based on the analysis, we recommend that GB can come in in to both China and Brazilian market with different strategic attacks given in the instance analysis.