Rio Tinto plc (ADR) (RIO), BHP Billiton Limited (ADR) (BHP), Freeport-McMoRan Copper & Gold Inc. (FCX): Are China and this Copper Mine a Match Made in Heaven?

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Deep in the middle of the Gobi Desert, there is a city like many others. There are restaurants, houses, citizens, basketball courts, and enough jobs to go around. It’s a civilization in the most unlikely of places, but there’s money to be made here in the form of copper.

Welcome to Oyu Tolgoi, Rio Tinto plc (ADR) (NYSE:RIO)’s newest copper mine, now ready for action and ready to sell to the No. 1 copper consumer: China.

China needs copper, and badly

In 2011, China was a consumer of nearly 8 million metric tons of copper, accounting for 40% of the world’s total. This copper is used in everything from electronics to infrastructure. The trend began in 2002, when China supplanted the US as the world’s largest copper consumer, despite having a very limited supply of copper ore.

Rio Tinto plc (ADR) (NYSE:RIO)

Therefore, China has had to buy scrap copper and build smelting facilities to make it usable. With China’s economic growth slowing, it will need copper for transportation and infrastructure reforms to stabilize economic growth, which combine for 62% of China’s copper usage. By 2014, it is expected that China will consume nearly 84% of the world’s copper, at 9 million metric tons, indicating that copper should see increased demand.

These developments make Rio Tinto plc (ADR) (NYSE:RIO)‘s Mongolia mine all the more lucrative. China imported 7% of its copper from Mongolia in 2012, when Oyu Tolgoi was just starting up. By having a mine like that on their doorstep, it would decrease China’s reliance on copper from Latin America, particularly Chile.

Mongolian copper’s best customer

Whichever operator is closer to China in terms of mining production will stand to benefit the most from China’s surging production, and the best situated company is Rio Tinto plc (ADR) (NYSE:RIO). This quarter was very significant because the Oyu Tolgoi mine sent its first shipment of copper to China. This output helped push Rio Tinto plc (ADR) (NYSE:RIO)‘s mined copper output up by 10% year over year, a significant improvement.

The mine was an expensive proposition, costing $6.2 billion over three years, but according to analysts, it will produce over 450,000 tons of copper annually, valued at $1.4 billion a year at spot price. Rio Tinto plc (ADR) (NYSE:RIO) owns a 46% stake in the mine, which at full capacity will increase Mongolia’s GDP by 30%. The total costs increased unexpectedly to $10 billion, though it should be profitable by 2021, assuming a current copper spot price of roughly $3/pound and continuing demand from China.

Will Chilean copper lose market share?

With this new mine set to make big profits for Rio Tinto plc (ADR) (NYSE:RIO), it allows the company to be more competitive against fellow copper big-shot BHP Billiton Limited (ADR) (NYSE:BHP), which has a 57.5% stake in the Escondida mine in Chile, the world’s largest copper mine. This grants access to a mine that produces 152,000 tons of copper per day, valued at $474 million, dwarfing Oyu Tolgoi. However, unlike Rio Tinto, BHP Billiton Limited (ADR) (NYSE:BHP) does not have a significant investment in Asian copper mines, even though it has the inside track at Escondida to fill the western hemisphere’s copper needs. If China does become more reliant on copper, BHP Billiton Limited (ADR) (NYSE:BHP) might need to consider investing in Mongolia.

Freeport likes Asia as well

One option for BHP Billiton Limited (ADR) (NYSE:BHP) to tap into China’s growing appetite is to look toward Indonesia, where Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) collected 158 million tons of copper for sale last quarter. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s net income for the quarter was down $300 million year over year to $482 million, largely due to $5.5 billion in capital expenditures, which shows that the company is looking to bulk up its copper capacity as well as an expansion into Indonesia. The company was able to sell 951 million pounds of copper this quarter, with 158 million coming from Indonesia.

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