Ambivalence is perhaps the best way to describe the market’s reaction to Rio Tinto’s June report


Ambivalence is perhaps the best way to describe the market’s reaction to Rio Tinto’s June quarter report. Whilst the tussle between bulls and bears rages on as fears of a double dip persist, it is unlikely that the major miners will outperform the broader market.  Rio’s chief executive, Tom Albanese may have reported that the markets were strong for most of the company’s products however he also stated that the pattern of volatility in markets will continue.

From an output perspective, it has been a mixed quarter for Rio.  The group’s copper division is battling lower grade ore at some operations, notably at the Bingham Canyon mine, the flagship asset of Kennecott Utah Copper.   At the Escondida mine the copper grade was 6% higher but maintenance activities lowered production of refined copper.

Rio has estimated much lower production from the Grasberg copper-gold mine because of lower grade and lower throughput.  The Oyu Tolgoi mine however will help arrest the fall in copper production when mining begins in 2013 however, it will take 5 years to ramp up to full production.

Elsewhere, increased capital expenditure in Queensland has expanded production of coking which rose sharply by 29% in 2Q10 over first quarter.  The production targets for Australian Coal amount to a total of 32.4 million tonnes, a sharp 22% increase in 2H10 production of 17.8 million tonnes.

At other operations the production of uranium suffered due to falling grades and instability in the pit that was caused by un-seasonal heavy rain.  Production of diamonds however soared following a return to more normal production levels at the Diavik mine in Canada, where production was increased to meet rising demand.

Economic data from China has never demanded so much attention and it is our view that China is not going into reverse. Rio has reported that total iron ore sales volumes from its Pilbara operations in Western Australia for 2Q10 of 56 million tonnes were 5% higher q/q and 6% higher on a year ago.

The spot price of iron ore however has fallen from almost US$180 per tonne to only US$116 per tonne.  Chinese stocks of iron ore and steel are reportedly high and domestic steel prices are still under a lot of downward pressure. China is also ramping up its domestic supply of iron ore.

The trend to quarterly iron ore pricing is not going to look very smart if the spot price continues to plummet. Rio’s says that 50% of its Asian customers have signed on to quarterly pricing.

The watered down Mineral Resource Rent Tax seemed to have an immediate effect on Rio’s decision making process. This is somewhat strange because an Australian election is not far away and the tables could easily be turned against the big miners. Be as it may, the company has announced that it will go ahead with a US$200 million expansion to increase the overall capacity of the Pilbara to 330 million tonnes and eventually higher.

Article produced by Senior Research Analyst, Nick Raffan. 

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