PetroChina (PTR), Sinopec (600688-SH) Chinese Energy Companies Stand Out; RIM Maintaining Shareholder Value; Canada Records Budget Surplus In January

For the month of January 2012 Canada recorded a monthly surplus ($1.7 billion), the first since February 2009. Canada's fiscal year ends in March; Thus far (March 2011 to January 2012) the federal deficit is $16 billion down from $27.7 billion in the previous period. Canada's annual deficits aren't expected to end until 2015 at the earliest (when it may be +$3.4 billion). For the 2010 ten month period ending Jan 2012, the reduction in deficit is attributable to higher revenues ($189b --> $197b) being met with lower program spending (-1.7%; $194.1b --> $190.8b). Canada's public debt spending is up +$300 million.

China sets sights on Mongolia

China already does a lot of business in Mongolia with state-owned Batou Steel Rre-Earth operating Inner Mongolia's large Bayan Obo mine. Now, coal company Shenhua Energy (China's biggest coal producer) is aiming to secure a 40% interest in the world's largest deposit of steelmaking coking coal, Tavan Tolgoi (home to six billion tonnes of coal), by mid 2012 just after Mongolia's next general election. Mongolia hasn't been an easy place for companies to do business; Last July, Mongolia promised Shenhua 40% of the project but that deal was revoked after other countries deemed the process unfair. Other bidders come from the US (Peabody Energy) and Russia (Russian Railways). The other major coal deposit in the south Gobi region Ovuut Tolgoi, was recently invested in by Chinese coal company Chalco (subsidiary of Chinalco); Chalco boughtout Ivanhoe Mine's 57% stake for $889 million. The largest resource in the South Gobi region is copper mine Oyu Tolgoi. At its peak Oyu Tolgoi will be the source of one third of Mongolia's gross domestic product. China is the world's leading consumer of coal.

China's largest oil company by production, Petro China (86% state-owned) produced more oil in 2011 than ExxonMobil after Exxon posted a reduction in total volumes. Exxon production -5% to 2.3M bpd while Petro China production +3.3% to 2.4M bpd. Petro China is a growing company that's for sure, but does that make it a great investment stock? I'm not so sure about that. Petro China was created with one objective: To feed China's increasing energy appetite. China's demand for petroleum products will grow by 100% over the next 25 years. The company is probably not overly concerned with shareholder value but who can blame them? China needs to secure oil in order to support the 8 and 9% gdp growth rates and state-owned enterprises like PetroChina and Sinopec are getting the job done.

Sinopec petro output was up +1.6% to 407.9M boe in 2011 (1.1M bpd) HOWEVER the increase came only from natural gas (73.6M boe --> 89.2M boe), crude oil production was down -1.9% to 321.7M boe). The higher output didn't add to profits; Fourth quarter earnings at Sinopec were down -23% attributed to a number of factors including higher tariffs in China (+7.1%) and the lower price of natural gas. In the first quarter of 2010 PetroChina bought a 9% interest in Canadian oil company Syncrude. In January 2012 a major Athabasca oil sands project came under complete control of PetroChina after the company paid $673 million for the 40% of shares that it didn't already own.
Warren Buffet was a PetroChina shareholder until September 2007. A lot of PetroChina's oil comes from Daquing and Changquing.

Sinopec, China's number two oil and gas company is China's largest oil refiner providing the country with 80% of its fuel. Due to increasing profits, in 2010 the company made Fortune 500 top ten list which is a feat considering the prices it receives for its produces is less than it would have in the free market due to governmental restrictions on pricing.

Research In Motion

The device marker is currently undergoing changes as evidenced by the resignation of key board members and an explicit desire to refocus business away from the consumer market. I'd interpret the company's recent statements this way: In countries such as the United States and South Korea where BlackBerry overall market share is low, the company will not have app using-typical users as the primary target for marketing however, in other countries such as the Canada, Argentina, South Africa and Indonesia (and maybe even the UK) RIM's existing consumer market will continue to be supported in a positive way (this is assumed given that the company stated it will cede only selected markets) - This is a wise decision for Research In Motion considering asset writedowns associated with the company's market value, reduced net income by more than $300 million in the latest quarter (ended March 2012).

I'm not really disappointed by RIM's latest results. PlayBook sales are up to 500,000 units from 200,000 units in the previous quarter. In the same quarter, adjusted net income was just over $400 million which is comparable to the previous quarter when revenue was significantly higher. PlayBook now holds 15% of the Canadian tablet market, up from 5% in late 2011. RIMM's stock was up +7.06% the day following the news (Friday March 30, 2012). Also note that 90% of Fortune 500 companies use the BlackBerry phone.

Rio Tinto (RIO) Production up only for Aluminum, Bauxite, Iron, Salt, Borate & Titanium; Copper Will get a boost from Ivanhoe Mines (IVN), Pilbara, Escondida

Rio Tinto's largest projects as of January 2012 (indepth look here)

Project												New Annual Output												Metals												Year												Total cost
Pilbara 283												53 Mt												iron ore												2014												$9.7 bil
Oyu Tolgoi												1.2b lb 650th oz 3m oz												copper gold silver												mid 2013												$6.0 bil
Kitimat												400th tonnes												aluminum												3Q 2014												$3.3 bil
Yurwun 2												2 Mt												alumina												3Q 2012												$2.3 bil
Argyle												20 mil carats capacity												diamonds												2Q 2013												$2.1 bil
Hope Downs 4												15 Mt (30 yr life)												iron ore												mid 2013												$2.1 bil
Kestrel												1.3 Mt												coal												mid 2013												$2.0 bil
AP 60 Quebec												60 kt												aluminum												2Q 2013												$1.1 bil
Marandoo Aus												15 Mt												iron ore												early 2015												$1.1 bil
Iron Ore Company Canada 1 2												5.3 Mt (Rio owns 59%)												iron ore												early 2013												$763 mil
ISAL Iceland												40th tonnes												aluminum												mid 2012												$487 mil

      Rio Tinto (RIO) had a lot going for it and against it in 2011. Copper grades and low exit-year prices affected earnings in the second half. Fiscal year results were buoyed by iron ore which saw prices peak mid year and output grow to record levels (ended the year at $140/tonne vs high of $180/tonne mid year). Rio Tinto is Australia's biggest iron ore exporter and also a major producer of its coal (coal is Australia's single largest export earner). A $7 billion share buy back plan is nearing completion.

Of the $33 billion capital projects underway the largest one, Pilbara 283 ($9.7B) won't be ready until the end of 2013. The second largest, Oyu Tolgoi phase 1 ($6B) will be ready midyear 2013. Nine of the eighteen projects will be completed in 2012. 2015 is on track to be a big year for Rio with 167.7 million tonnes/yr of new iron-ore production coming online.

Notes:
-Grasberg, Indonesia has been a joint venture with Freeport-McMoran since 1998.
-Sold 100% interest in Colowyo on Dec 1, 2011
-Rio is no longer in the business of talc as of August 1, 2011. That's why talc output is down; No attributable production from there since the 3Q 2011 when output fell to below 100 mil tonnes for the first time ever.  The talc unit, Luzenac which is the world's leader in talc production, was sold to a French company for $340 million.
-2012 will see new copper production from Coal & Allied in which Rio Tinto now has an 80.0% interest up from 75.7% (effective December 16, 2011).
-Spun off US coal operations in Dec 2010. That transaction netted the company $2 billion however it cut off nearly three quarters of Rio Tinto's coal production going back to 2009. The new company formed in the spinoff is Cloud Peak Energy which trades on the New York Stock Exchange as CLD.
-On Feb 20, 2012 announced a $518M investment in autonomous Iron Ore rail cars that will operate in Pilbara, Australia beginning in 2014 (at present Pilbara is the site of a major expansion project underway that will boost copper output significantly over the coming years beginning in 2013).
-all of the company's molybdenum comes from Kennecott Utah
-February 3, 2012: Rio Tinto Alcan begins restarting aluminum smelters in Shawinigan, Quebec
-Doubled interest in Richards Bay Minerals to 74% from 37%. RBM is a South African titanium dioxide company. That will lead to an inevitable increase in titanium production.
-Hecla Mining, the US's largest primary producer of silver gets 68% of its silver from a mine that Rio Tinto owned up until April 2008 (Green's Creek).

Financial Highlights quoted in US Dollars
Higher commodity prices led to a record in underlying earnings (+11% to $15.5 billion), record in ebitda (+10% to $28.5 billion) and record in cash flow from operations (+16% to $27.4 billion). Capex was 2.67X higher at $12.3 billion. Surprisingly all of this didn't translate into higher net earnings which were down 59% to $5.8 billion on account of impairment costs amounting to $8.9 billion, associated with the aluminum business. Don't be too concerned about the fall in EPS to $3.035 from $7.31 in 2010; dividend per share was $1.45 +34% vs 2010. Here's some background on what Rio Tinto excludes when determining underlying earnings.

In 2011 Rio Tinto spent $6.1 billion on acquisitions, $2.2 billion on dividend payouts and $6.2 billion on taxes. Cash flows from operations have nearly doubled since 2009. Targeted 2012 capex is $16 billion or over 30% higher than 2011 with about 3/4 of it going to Australia (over half) and Canada (less than a quarter).

Iron Ore
This continues to be Rio Tinto's backbone. It is the largest source of EBITDA contributing 73.4% of the group's product total of earnings before taxes ($20.93b/$29.491b) which is up from 62.4% in 2010 (was as low as 43% in 2008). Iron ore contributed 78.0% of group earnings in 2011 up from 67.6%.

Iron ore output from the 6 of 8 Hamersley iron ore mines that Rio owns outright, was 7.8% higher on the year (121.525M tonnes). The other two Hamersley mines are 60% owned and produced 15.994M tonnes (up 1.13% from 15,816 in 2010).

As of 2011 global iron ore production capacity was announced for 800 Mt annually but by 2011 4Q only 200 Mt was achieved.

Copper
Contributed 6.9% of ebitda down from 16.9% in 2010. Copper earnings were down 23.6% and the reason for that is two-fold: total mined copper down 23% stemming from lower grade ore at Escondida and Kennecott Utah, the same thing that negatively affected results at the end of last year and also the price of copper, down to $3.44/lb in December from $4.24/lb mid year. The lower grades are only temporary given that grades will come in higher in the coming years due to the commencement of operations at new projects/expansion projects

Oyu Tolgoi - Construction is currently 70% complete, by 2013 it should be producing 1.2 billion pounds of copper per year then working its way up to 1.7 billion pounds by year seven in 2019-2020. Ivanhoe Mines has a direct, controlling stake in the project (66%, ownership is not through South Gobi) and Rio Tinto has a 49% interest in Ivanhoe Mines and strong board representation (7/13 Ivanhoe board members represent the interests of Rio Tinto). Just recently Bank of America said that Ivanhoe Mines will be a leading position for copper in 2018 when it will be "one of the world's 10 leading copper producers".
Escondida - the site of major project expansions underway in Chile where just last week Rio Tinto and its partners (30/70 interest) approved a $1.4B expansion.
Pilbara - Output expands to 283M tonnes/yr by 2013, 353Mt by 1H2015. The company just announced yesterday its US$518 million autonomous rail network which will the first of its kind. Rio Tinto's rail network is currently 1,500 km long and has 148 trains. Copper production from Pilbara was down 7% in 2011 due to lower recoveries key equipment being unavailable.

Rio Tinto is probably not complaining about the temporary decline in copper production considering that copper prices ended the year at a low point (3.44/lb Dec 31 vs $4.24/lb June 30).

Northparkes was only one of five major copper operations that recorded a year on year increase in output. Mined copper was +29% on the year, +34% in the 4Q as a result of optimization projects being implemented & higher grades from section E48.

Gold and Silver
Lower grades caused gold (-12.3%) and silver (-27.0%) output to decline from 2010 levels however that is expected to change in 2hlf 2012 and 2013 when grades will get a boost from new mining activity in Mongolia and elsewhere. Oyu Tolgoi possibly beginning in 2013, will produce silver at a rate of 3 million ounces a year (59 year mine life) and 650,000 ounces of gold.

33.2% of the decline in silver output (605/1823) was due lower production from Grasberg, the smallest of Rio's four silver mines; Grasberg is a joint venture. Silver production from the largest of its operating mines, the 100% owned Bingham Canyon mine was 20% lower to 2.976 mil ounces. The second largest source of silver, Escondida is only 30% owned (prod there down 29.5%).

Though mined silver production fell on the year, refined silver output (all of it occurring at Kennecott Utah) was +32.61% to 4.732 million ounces.

Primary Aluminum
13 of the 21 mines are 100% owned. Those 13 produced 2442 thousand tonnes of aluminum in 2011 up 30.73% from 2010 when output was 1868.

Diamonds
The largest of Rio's three diamond mines is Argyle in Western Australia. Argyle produced 7.441m carats in 2011 which is down 24.1% from 2010. In contrast, the 60% owned Diavik mine in NWT increased its output by 2.72% to 6.677m carats while 77.8% owned Murrowam Zimbabwe produced 2.06X more at 367,000 carats.

mining companies to keep watch of

1 Ivanhoe Mines - Due for a breakout year in 2011 could go from minor producer (1 million tonnes of copper annually) to major producer (billion tonne copper, million ounce gold producer) and is a lot less risky than people think (even if all its operations outside of the oyu tolgoi project are a bust rio tinto's interest in that project will keep Ivanhoe's value at or above US $6.5 billion).

2 Osisko Mining - Involved in many underrated projects and its 2 largest ones could make it a 1 million ounce of gold producer quickly.  Its reserves estimate is conservative and as a mid cap exploration company it could be the subject of a lucrative takeover.