Rio Reports Record Higher Iron Ore Output, Yearly Guidance Intact

Rio Tinto (NYSE:RIO) reported a strong Q3 operating performance across most business segments. The company reported record quarterly iron ore production, primarily due to increased production from its Pilbara mines in Australia. Copper production was higher due to the ramp up at Oyu Tolgoi in Mongolia and the continued recovery at Kennecott in the U.S. Copper, thermal coal and aluminum production were all higher this quarter on a year-over-year basis. ^[1]

Rio also completed the first phase of its iron ore production expansion at Pilbara in Australia. This region will now produce 290 million tonnes of iron ore per year. When the second phase is completed, the production capacity will expand to 360 million tonnes, thus making Rio the biggest producer of iron ore in the world, ahead of Vale.

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 iron have been rising on the back of resilient Chinese demand while that of aluminum and copper have been declining.

We have a Trefis price estimate for Rio of $55, which represents 7% upside to the current market price.

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Operational Performance

Iron ore production for the quarter was reported to be 68.3 million tonnes while total shipments stood at 68 million tonnes. While production was higher by 2% on a year-over-year basis, sales were higher by 4%. The higher production was attributed to productivity improvements and commissioning of the Hope Downs 4 mine. The company maintained its yearly iron ore production guidance of 265 million tonnes. You can check the effect of iron ore shipments on Rio’s valuation using our interactive graph below.

At 162,300 tonnes, mined copper production was 23% higher year-over-year. Production grew due to a sustained recovery in ore grades at the Kennecott Utah Copper and Escondida mines and increased production at the Oyu Tolgoi mine. While production of thermal coal showed a 14% year-over-year growth, the production of hard coking coal declined by 6% due to the ongoing transition at the Kestrel mine in Australia. Bauxite production was 9% higher than in Q2 2012, driven by higher requirements at the expanded Yarwun alumina refinery and increased third-party demand. Aluminum production was 9% higher than the corresponding quarter in 2012, reflecting the resolution of the lockout at Alma and the resumption of production following the power outage at Shawinigan.

Notable Developments And Outlook

Production guidance for 2013 remains largely unchanged, except for copper, expectations for which were revised upwards. Instead of the previous annual production guidance of 150,000 tonnes at the Kennecott Utah mine, Rio now expects a production figure of 185,000 tonnes. This is due to progress in building a new road to help with waste removal and remediation work at the mine which had suffered a landslide six months ago.

Rio Tinto had set itself an exploration and evaluation spend reduction target of $750 million for 2013. In the first nine months, it has already managed to achieve savings of $729 million and is therefore on track to meet the annual target comfortably.

Rio Tinto entered two deals to sell non-core assets in line with its strategy of focusing on core assets which give good returns. The company entered a binding agreement to sell its majority stake in the Northparkes copper mine to China Molybdenum Corporation for $820 million. This transaction is expected to be completed by the end of the year. ^[2]

Earlier this month, Rio also signed a conditional Sale and Purchase agreement to sell its mothballed Blair Athol coal mine in Queensland to Linc Energy. The financial terms of the deal haven’t been disclosed so far and the transaction is expected to be completed within six months. ^[3]

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1. Third quarter 2013 operations review, Rio Tinto Media Release [↩]
2. China Molybdenum to Pay $820 Million for Rio Copper Mine, Bloomberg [↩]
3. Done deal: Rio sells mothballed Blair Athol coal mine to Linc Energy, Mining.com [↩]