Rio Tinto Q1 Output Up And Production Guidance Intact

Rio Tinto (NYSE:RIO) has released its operations review report for Q1 2013. The company said that it has achieved significant milestones at its two major growth projects at Pilbara in Australia and Oyu Tolgoi in Mongolia. According to CEO Sam Walsh, the firm remains on track for first production this year and will deliver attractive returns to shareholders in the years ahead. The copper operations have been hit due to a landslide at the Bingham Canyon mine in Utah which has resulted in the suspension of production.

Year-over-year, Rio’s iron ore production was up and so was the production of aluminum mined and refined copper. However, the production of hard coking coal and alumina declined. The production of alumina was affected by production issues at the Gove refinery whereas production of hard coking coal was impacted by operational issues and wet weather at the Hail Creek mine.

The company releases financial numbers on a semi-annual basis rather than a quarterly basis. Hence, there is no data available on price realizations for iron, aluminum and copper – the three most watched commodities in the market. Market prices of each of these have been declining for quite some time.

See Full Analysis for Rio Tinto Here

Operational Performance

Rio achieved a record first quarter iron ore shipments of 57.3 million tonnes, a 7% year-over-year increase. This was achieved on operational streamlining, productivity improvement and a rapid recovery from seasonal weather disruptions. The Pilbara iron operations are running at full capacity of 237 million tonnes a year and are on track to achieve a capacity of 290 million tonnes in the third quarter. You can check the effect of iron ore shipments on Rio’s Trefis valuation using our interactive graph below.

At 150,000 tonnes, mined copper production was 26% higher year-over-year. However, Rio has had to revise its production guidance for copper for the rest of the year due to a landslide at its giant Bingham Canyon mine in Utah that accounts for 17% of the United States’ total copper output. Rio’s share of mined and refined copper production in 2013 is now expected to be approximately 540,000 tonnes and 205,000 tonnes, respectively. This assumes a production decline for mined copper at 125,000 tonnes and refined copper of about 100,000 tonnes.

While thermal coal production showed 28% year-over-year growth, coking coal production declined by 3% due to the impact of lower than expected overburden removal in 2012 as well as wet weather. Bauxite production was 10% higher than Q1 2012 driven by higher volumes at Weipa, in line with increased bauxite requirements from the expanded Yarwun refinery and increased third party demand. Aluminum production was 14% higher than the corresponding quarter in 2012, reflecting the resolution of the lockout at Alma and the power outage at Shawinigan. The ramp-up of smelting capacity at Alma continued and the smelter operated at close to full capacity throughout the quarter. ^[1]

Going Forward

Production guidance for 2013 remains largely unchanged except for copper.

The company is looking to make cost savings worth $5 billion in the next two years and has expressed its intent to sell off some non-core assets. Due to falling global coal prices, rising input costs and strengthening of the Australian dollar, it has put on sale some of its coal assets like Coal and Allied Industries in Australia’s New South Wales province and other mines in Queensland. The company has been trying to sell aluminum assets bundled under the Pacific Aluminum division but hasn’t found a buyer willing to pay its asking price. The diamonds business has also been on the block for a long time now. We might see some or all of these assets being sold going ahead. ^[2]

On the pricing front, Rio appears to be headed for hard times if market data is anything to go by. Commodity prices have been tumbling, especially those of copper, iron ore and aluminum. ^[3] A lot of the blame could be ascribed to slowing Chinese growth, but there are other issues such as surplus capacity which are accentuating the negative trend. The financial impact on Rio will be known only at the end of the second quarter when it releases its semi-annual earnings report, but we expect negative growth in revenues and earnings year-over-year. ((LME Copper Prices, LME))

We have a Trefis price estimate for Rio of $56.

Understand How a Company’s Products Impact its Stock at Trefis

1. Q1 2013 Operations Review, Rio Tinto Media Release [↩]
2. Coal India seeks to buy Rio Tinto’s mines, DNA [↩]
3. LME Aluminum Price Graph, LME [↩]