Rio Tinto (
RIO
) reported a strong Q3 performance despite challenging market
conditions, particularly in the wake of a slowdown in China. The
company reported record quarterly iron ore production,
primarily due to increased production from its Pilbara mines in
Australia. Copper, coal, bauxite, alumina, and titanium dioxide
production were all higher this quarter on a year-over-year
basis.
These results are surprising given the weak global macroeconomic
conditions. It remains to be seen to what extent profit margins
have been eroded as a result of lower prices, particularly for iron
ore. We'll have to wait for the annual report to get a better idea
on this front since the company reports financial performance only
on a half-yearly and annual basis, not quarterly. It has only
released an operations review report for Q3 2012. Rio does
not hold a briefing after its production report is released so
it is difficult to get an idea of its quarterly financial
performance or its view on market conditions. However, using
other sources like its recently concluded investor seminar
presentation and transcript, it is clear that the company is upbeat
about its long-term prospects. These sources also give us some
insight into the management's current thinking and strategy.
See Full Analysis for Rio Tinto Here
Operational Performance
Iron ore production from its Pilbara mines was reported to be 63
million tonnes while total production stood at 67 million tonnes,
both 5% higher on a year-over-year basis. The company maintained
its yearly iron ore production guidance of 250 million tonnes. You
can check the effect of iron ore shipments on Rio's Trefis
valuation using our interactive graph below:
At 132,000 tonnes, mined copper production was 21% higher
year-over-year. While production of thermal coal showed 21%
year-over-year growth, production of coking coal declined by 13%
due to the impact of dragline mechanical issues at Hail Creek and a
major plant shutdown at Kestrel as part of the mine extension
project. Bauxite and alumina production were 13% and 20%
higher respectively than Q2 2011, driven by increased third
party demand for bauxite, expanded refining capacity at Yarwun, and
record production at Gove. Aluminum production, however, was
10% lower than the corresponding quarter in 2011, as ramp up to
normal capacity continued following resolution of the Alma labour
dispute. ((
Third quarter 2012 operations revie
w, Rio Tinto Media Release))
Strategy And Perspectives
From the investor seminar material, we conclude that the company
is giving importance to reducing costs across its operations,
and isn't likely to approve any new, large-scale capital-intensive
projects in the near term. This is in view of weak commodity prices
and a faster-than-expected cooling of China's economy. It, however,
intends to remain on track with expansion plans in the Pilbara iron
ore region. The aim is to expand extraction capacity to 283
million tonnes a year by the end of 2013 and to 353 million tonnes
per year by 2015. The overall capital expenditure in future is
expected to come down from this year's expected figure of $13.7
billion.
The company is also focusing heavily on leveraging technology to
increase efficiency and keep costs under control. It already has a
program in place called "Mine of the Future" with dedicated
resources. In view of burgeoning capital costs in the mining
sector, this sounds like a good long-term strategy.
Rio is betting on rapid urbanization to drive demand for steel
and thus iron ore. It considers China to be a key market until the
mid-2020′s. It already derives about 80% of its earnings from
iron ore, the bulk of which is sold in
China. In the near-term, iron ore prices might
rise since some producers in China have halted operations due to
high costs and low prices. The economic stimulus provided by the
Chinese government is yet to show its effect as well.
We agree with Rio's assessment about future demand and think
that average commodity prices will be higher than those in the
past. Periodic bouts of volatility may persist but nonetheless,
growth is expected to be high on the whole. The population in
emerging markets remains aspirational and there is significant room
for growth, given the low starting base in many of these
places.
We have a Trefis price estimate for Rio of $45 which is
nearly 7% below its market price.
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