Rio Tinto Iron Ore Output Misses Estimates as Price Falls

By David Stringer

The world’s second-biggest mining company Rio Tinto Group (RIO) cut production of minerals including aluminum and copper as tumbling prices force suppliers to reassess growth plans.
Output of 10 of Rio’s 13 key materials fell in the three months to Dec. 31 from a year earlier, the London-based company said today in a statement. Iron ore production rose to 79.1 million metric tons, missing the 82.2 million-ton median estimate of three analysts surveyed by Bloomberg.
The price of copper tumbled 6.2 percent last week, the biggest drop since 2011, as the World Bank cut its forecast for the global economy. A Bloomberg Commodity Index (BCOM) of 22 raw materials last year declined 18 percent, the fourth straight annual decline and the longest slump since at least 1991.
“There’s no doubt the numbers are lower than people expected,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., said by phone. “You could draw the c
onclusion that prices are finally driving some decision making.”
Rio is seeking to respond more quickly to changing market conditions and plans to manage its business for cash this year, Chief Executive Officer Sam Walsh said in a Jan. 15 internal e-mail to staff, a copy of which was obtained by Bloomberg News.

Photographer: Ian Waldie/Bloomberg

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“This means focusing only on projects that deliver the highest returns,” he said in the message, which warned lower commodity prices would make 2015 a tough year.
Coking and thermal coal, diamonds, bauxite and alumina were among units to report declines, led by a 50 percent slide in refined copper output, Rio said. Uranium and borates were the only commodities with iron ore to record an increase in the quarter.
Rio declined as much as 1.7 percent to 2,808.5 pence and traded at 2,838 pence as of 8:55 a.m. in London, valuing the company at about $80 billion. The stock had fallen 0.9 percent to A$53.69 at the close in Sydney, extending its decline this year to 7.4 percent.

Tumbling Prices

Increasing supply of low-cost iron ore from Australia and Brazil is outpacing demand growth in China, the biggest consumer, spurring a 47 percent plunge in prices last year. The global surplus will swell to more than 200 million tons in 2018 from 35 million tons this year, according to UBS AG.
Full-year production of iron ore climbed to 295.4 million tons from 266 million tons and will increase to 330 million tons this year, Rio said. Vale SA (VALE5), the biggest exporter, forecasts it will produce 340 million tons of iron ore over the same period.
Increases in production of iron ore, Rio’s biggest earning unit, will support plans to raise shareholder returns when the company announces financial results next month, according to Lucas. Boosting returns would help build support ahead of any new merger approach by Glencore Plc (GLEN), after Rio rejected an offer made in July.
“Sam Walsh’s key manta and motivation this year will be to keep the wolves at bay,” Lucas said.
Copper mine output fell to 128,300 tons in the quarter, from 165,600 tons at the same operations a year earlier. That missed the 144,000 ton-median estimate of five analysts surveyed by Bloomberg.
Production declined on lower grades and throughput amid a planned smelter shutdown at Kennecott in Utah, where output fell 68 percent from a year earlier, Rio said in the statement. A fire at Mongolia’s Oyu Tolgoi last month had a limited impact and a concentrator resumed normal activity on Jan. 3, it said.
“We have had a successful year of production, capped off with a robust fourth quarter,” Walsh said in the statement today. “Output is in line with our targets across all of our major products.”
Rio’s share of iron ore production in the December quarter rose to 63.2 million tons from 55.5 million tons a year earlier. That missed the 64.75 million-ton median estimate of four analysts surveyed by Bloomberg.

Spending Cuts

The producer is seeking to make further cuts to its iron ore production costs as it reduces capital expenditure in the year through June to less than $8.5 billion, the lowest since 2010.
Annual exploration spending fell to $765 million from $948 million in 2013, with about one-third allocated to the copper division in locations including the U.S., Russia and China, Rio said.
Iron ore may average $66 a ton this year as new projects add to seaborne supply, UBS said Jan. 15 as it cut its price forecast by 22 percent. Iron ore delivered to China averaged about $76.50 a ton in the fourth quarter, compared with about $135 the year before. It averaged about $97 in 2014, according to Metal Bulletin data.

Rail Expansion

Expansions of rail and port facilities in Western Australia to support an eventual increase in output to 360 million tons a year is 80 percent complete and on schedule to be finished before July, the producer said.
Ore with 62 percent content delivered to the port of Qingdao fell 0.8 percent on Jan. 19 to $68.09 a dry metric ton.
As China’s economy transitions to consumption-led growth from investment-led expansion, Rio has flagged investments to boost output of copper, used in energy transmission to appliances, and bauxite, the ore used to make aluminum.
Aluminum production fell to 842,000 tons from 853,000 tons in the same period 12 months ago, while bauxite output dropped to 10.8 million tons from 11.4 million tons a year earlier.