Rio Tinto and Codelco’s pragmatic cooperation: a trend in mining that could spread to oil?

A technology agreement between Rio Tinto and Codelco – two of the world’s biggest copper mining companies – raises the prospect that large resource companies might pool tech R&D, jointly funding and jointly benefiting from new ways of uncovering more geologically difficult deposits.

Rio and Codelco’s “Rio de Cobre” alliance, announced last week, allows both companies absolute rights to ‘peer over the fence’ at each other’s copper-extracting technologies, said John McGagh, head of innovation at Rio, when talking to the FT yesterday. Rio has a greater expertise in surface mining technology. Codelco, experienced in Chile’s mature mines, has unrivalled expertise in underground copper mining. It is expertise Rio can use if it is to go underground at new projects like Oyu Tolgoi in Mongolia.

The idea would have been unheard-of not long ago, with proprietary mining technology a target more for industrial espionage than cooperation. After all, these are two of the world’s biggest companies and both have large R&D and tech budgets. The idea made sense, said Mr McGagh, because of the increasing complexity of prospective mineral deposits and the clear advantage of extracting metal as soon as possible from these complex deposits.

Lead times for projects like Oyu Tolgoi, from green field to production, are pushing 8 years on average already.

The details have not been worked out yet, but the framework is for an independent committee, composed of both companies’ staff, to run the technology joint venture (given an appropriately Spanish name considering the moniker of the Anglo-Australian mining giant and the Chilean identity of the state-owned copper miner). They have not yet put an estimate on how much money a year it will save both companies.

There is no reason, however, that the leap the two companies have made cannot be extended to oil and gas industries. The technology expertise and expense required to pull hydrocarbons out of mineral sands or deep seas has not reached a point of being uneconomic for oil majors of Rio Tinto’s size. But they too may face the pragmatic issue of whether certain resources may be pooled to extract the same resource from independent fields.

In mining at least, this is part of a nascent trend this year of the majors selectively cooperating instead of trying to outright combine. The key example here is the proposed iron ore joint venture of BHP Billiton and Rio Tinto. BHP’s $100+ billion merger proposal, pitched in the easy-money days of 2007, was predicated on the synergies inherent in combining the operations, management, infrastructure, and marketing of the two companies’ adjacent iron ore fields in Australia.

After the takeover battle fell apart, they unveiled in June a plan to combine the operations and infrastructure of these fields and keep the marketing of the iron ore separate. This is less costly, less risky, and more pragmatic. Whether it passes regulatory muster is a different story. But it sounded the first note of multi-billion-dollar cooperation in an industry that is no less rivalrous than oil.

The Rio de Cobre alliance could pave the way for more partnerships across the capital-intensive resources sector as it continues to slog through capital-constrained times.

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