Rio Tinto slashes iron ore growth target

Rio Tinto has slashed iron ore growth targets after its WA driverless train program suffered more delays.

Rio slashes iron ore target

Rio Tinto has slashed iron ore growth targets after its $US518 million-plus West Australian driverless train program suffered more delays, further winding back supply in a flooded market.

Rio, which recently took the mantle of the world’s biggest iron ore producer from Brazil’s Vale, yesterday said its AutoHaul driverless train program, originally slated for a 2015 start, would be delayed from its latest mid-2016 target to an unspecified date.

“With the delay in AutoHaul, production from the Pilbara is now expected to be between 330 million and 340 million ­tonnes in 2017 (down from 350 million tonnes), subject to final productivity and capital expenditure plans,” the company said in its latest quarterly production report.

The delay is believed to be due to software glitches.

The latest guidance cut adds to a series of downgrades from Rio, largely attributed to weather, that are supporting a rebound in the price of iron ore, Australia’s biggest export.

Over the past year Rio has wound back production expectations from 2015 through to the end of next year by between 50 million and 60 million tonnes.

In 2015, Rio missed its original production guidance by 20 million tonnes, resulting in reductions in expectations for this year that have now flowed on to 2017.

The latest guidance cuts come amid an iron ore price resurgence that has seen the price of the commodity rise 36 per cent to above $US60 a tonne this year after a bounce in Chinese steel prices.

The cuts could provide further fuel to an iron ore market in which recent price gains are already ­expected to add some spending power to next month’s federal ­budget.

“This change could positively impact market sentiment for iron ore supply and demand, especially if we see BHP reduce its guidance as we expect (when BHP Billiton reports this morning),” UBS analyst Glyn Lawcock said.

The guidance cuts mean Rio is responsible for the biggest reduction in supply expectations of any of the major iron ore miners since Fortescue Metals chairman Andrew Forrest a year ago called for Australia’s big three producers to pull back expansion plans. Rio was already the biggest contributor to the pullback in supply ­expectations over the past year, which has helped the price rebound.

Before yesterday’s announcement, Credit Suisse had dropped its combined 2015 and 2016 forecasts of Rio production by a combined 40 million tonnes in the past year.

In contrast, the bank’s expectations for rival BHP’s Australian production in 2015-16 and 2016-17 have increased by 7 million tonnes over that time, illustrating productivity gains under former iron ore boss Jimmy Wilson.

Credit Suisse’s Fortescue estimates have risen slightly, by 2 million tonnes, while estimates for Brazil’s Vale production in 2015 and 2016 have fallen by a combined 22 million tonnes in the past year. This is partly because of the impact of the tailings dam disaster at BHP and Vale’s Samarco operations in Brazil, which also hit output from Vale’s nearby operations.

UBS is expecting BHP to lower its 2015-16 iron ore guidance of about 270 million tonnes to 260 million tonnes after a seasonally weak March quarter due to heavy rains.

Rio has left its 2016 global iron ore production guidance at “around 350 million tonnes”, despite previously having expected AutoHaul to start adding to production in the middle of this year.

A Rio spokesman said the company’s Pilbara 2016 production guidance of 335 million tonnes still stood.

If that is the case, Rio is in a good position to beat global guidance, because its Canadian operations are expected to produce 21 million tonnes this year, according to minority partners in its Iron Ore Company of Canada ­operations in Labrador.

But there is increasing scepticism that the company will hit its Pilbara target.

Despite the downgrade, Rio shares performed strongly yesterday, up $1.84 to a fresh five-month high of $49.20. BHP was up 5 per cent and Fortescue rose 7 per cent.

Rio reported first-quarter global iron ore shipments of 80.8 million tonnes, down from 91.3 million tonnes in the December quarter because of the West Australian cyclone season and seasonal restocking.

Credit Suisse analyst Paul McTaggart boosted his Rio target price from $45 to $50 and raised 2017 net earnings by 9 per cent.

Shaw & Partners analyst Peter O’Connor kept his $59 target price but cut 2017 earnings expectations by 5 per cent.