Rio Tinto misses mark on iron ore
Rio Tinto continues to ease iron ore output, cutting West Australian full-year guidance as it focuses on value.
Rio Tinto continues to ease the pressure on its Australian iron ore accelerator, cutting West Australian full-year guidance as it focuses on value over tonnage under new chief Jean-Sebastien Jacques.
In the wake of last month’s departure of iron ore boss Andrew Harding, Rio has for the first time confirmed that its Pilbara-region iron ore mines in WA would miss their most recent 2016 forecast by about five million tonnes, with forecast shipments now at 330 million tonnes.
The reduced guidance, down from 335 million tonnes of production and confirmed in Rio’s second-quarter report yesterday, comes a week after rival Fortescue Metals said it would beat its 2015-16 guidance by about five million tonnes. The Pilbara guidance has not really changed the market’s Rio outlook because a boost in Canadian iron ore expectations has left Rio’s global guidance of 350 million tonnes (which was not restated) effectively unchanged.
“We continue to focus on value and maximising cash flow from our assets, through both commercial and operational excellence,” Mr Jacques said in his first official statement since taking the reins from Sam Walsh on July 2.
“This will ensure that Rio Tinto is well positioned to generate compelling and consistent returns for our shareholders.”
The cuts mean Rio has now wound back its Pilbara expectations (variously switching guidance between shipping and production) by a total of between 55 and 65 million tonnes over 2015 to 2017 in the face of slowing Chinese demand growth, increased supply and problems with Rio’s rail capacity.
It lengthens Rio’s lead as the biggest contributor to a pull-back in Australian production expectations since Fortescue chairman Andrew Forrest raised the hackles of competition regulators a year ago by calling on Australia’s producers to band together to wind in expectations for supply growth. Fortescue has been the only miner of the big three (which also includes Rio and BHP Billiton) to actually increase expectations.
Rio’s pullbacks make it a substantial contributor to recent price strength in a market where Chinese import prices have unexpectedly remained above $US50 a tonne in the June quarter.
Mr Jacques’ further regrading of Australian iron ore expectations from Rio, which has previously said it would fully use its Pilbara port capacity of 360 million tonnes per year as soon as possible, was first evident in the company’s first-quarter report, a month after he was appointed CEO-elect and made deputy CEO.
In that report in April, Rio said problems with the AutoHaul robot train program would cut up to 20 million tonnes from next year’s Pilbara production, leading to 2017 guidance of between 330 and 340 million tonnes, which was restated yesterday.
At the time, the company said increased Canadian output did not foreshadow a drop in forecast Pilbara production, saying guidance of 335 million tonnes was intact, despite growing scepticism it would be met.
The scepticism was driven by increased guidance from minority partners in Rio’s Iron Ore Company of Canada operations in Labrador, which said production there would be about 21 million tonnes in 2016.
As reported at the time, this meant that Rio’s then 335 million tonnes from the Pilbara and 21 million tonnes from Canada did not add up to Rio’s global guidance of 350 million tonnes, meaning either a Pilbara cut or global increase was looming.
It was confirmed yesterday that it was the former.
Rio’s quarterly production report was mixed, with misses on consensus forecasts in iron ore and copper but with better-than-expected performance in bauxite, alumina and thermal coal.
WA iron ore shipments of 82.2 million tonnes were up on the previous quarter but missed expectations by about 2 million tonnes.
They brought first-half shipments to 159 million tonnes, meaning Rio will have to step up quarterly shipments to 85 million tonnes to meet the reduced Pilbara guidance.
Credit Suisse analyst Paul McTaggart said Rio might struggle to meet the guidance and is forecasting 328 million.
He reduced 2016 earnings forecasts by 3 per cent to $US3.32 billion on the reduction in shipment expectations.
Rio said a $US125 million charge because of $US4.5bn of bond buybacks would be logged at the company’s half-year earnings report, to be released on August 3.
Citi analyst Clarke Wilkins said the report had cut expectations for full-year earnings by 4.2 per cent to $US4.25bn, up on consensus expectations of $US2.7bn.
He is expecting first half underlying profit of $US1.96bn, well up on consensus estimates of $US1.36bn calculated before the production report.
Rio’s shares closed down $1.15, or 2.3 per cent, at $48.99. BHP ended down 1.9 per cent and Fortescue shares fell 1.5 per cent.
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