Gudai-Darri enters the market, easing Rio’s iron ore woes

Rio Tinto’s Gudai-Darri mine is finally up and running, but the delays to its entry into the market have cost Rio dearly.

New Caterpillar 793F haul trucks on site at Rio Tinto's new iron ore Gudai-Darri mine in WA. Picture: Supplied

Rio Tinto has taken a major step towards solving the woes in its flagship West Australian iron ore division as its Gudai-Darri mine sends its first shipment to port – but Rio has also unveiled a 20 per cent cost blowout at the mine.

Rio said on Wednesday it expects Gudai-Darri to have cost about $US3.1bn ($4.5bn) to build, almost 20 per cent ahead of projections of $US2.6bn, with the mine entering the market six months later than initially scheduled.

Gudai-Darri is the first new mine completed by Rio in a decade, and will supply high-grade iron ore to its customers. Its entry into the market will reduce the quantity of lower-grade product Rio has been selling into the market, and help lift volumes from its Pilbara iron ore network.

Shipments of lower-grade material from Rio’s mines made up about 15 per cent of its Pilbara exports in the March quarter.

Rio said on Wednesday Gudai-Darri’s first iron ore shipment was on its way to the port, with output from the new mine expected to lift through the rest of the year.

Gudai-Darri is expected to produce about 43 million tonnes of iron ore each year when the first phase of the mine is fully ramped up. The mine could eventually produce 70 million tonnes each year if an expansion goes ahead.

First production from the mine is well behind schedule, with Rio hit by delays caused by both the Covid-129 pandemic and then skills shortages in the resources sector. Rio gave the go-ahead for construction of Gudai-Darri in 2018, with first ore originally expected in late 2021 and costs tipped at $US2.6bn.

The cost blowout is larger than expected, given Rio said in February it expected its suite of Pilbara replacement projects to cost up to 15 per cent more than initially projected. Rio’s 2013 decision to defer the construction of Gudai-Darri as iron ore prices tumbled has been a major factor in the woes of the company’s iron ore division.

Over the last few years Rio has lost its coveted crown as the best Pilbara iron ore operator, with the company forced to wear rising costs and falling iron ore grades as it sweated ageing mines while it raced to finally bring new mines such as Gudai-Darri into production. The iron ore major’s need to mine below the Pilbara water table has added to its costs, as has the need to move more waste ore to access saleable material, and truck its ore from more distant parts of existing operations.

Rio’s Pilbara output peaked at 338.1 million tonnes in 2018, and its Pilbara operations shipped only 321.6 million tonnes in 2021. At the same time its cash costs of production have risen from $US13.40 a tonne in 2018 to levels projected at $US19.50 to $US21 a tonne this year – a potential increase of more than 55 per cent over four years.

Rio maintained full-year export guidance at 320 to 335 million tonnes for 2022 “subject to risks around the ramp up of new mines, weather and management of cultural heritage”.

RBC Capital Markets analyst Kaan Peker said the commissioning of Gudai-Darri would help Rio improve production volumes and improve the quality of its exports in the second half of the year, but sounded a warning on Rio’s rising costs given inflationary pressures across the economy.

“The project will increase its output of higher-value lump component of the Pilbara Blend and also reduce the contribution of SP10,” Mr Peker said in a client note on Wednesday.

“While 2022 Pilbara shipments and group capex was reconfirmed, 2022 Pilbara iron ore unit-cost guidance was not mentioned in today‘s release. We forecast $US21 a tonne for 2022, and expect costs to remain elevated on Covid costs, and mine development activities are expected to continue with higher material movements and drill and blast volumes.”

Rio shares closed down 9c to $110.96 on Wednesday.