AE Portfolio Aggressive Holding Rio Tinto Ltd (ASX: RIO, NYSE: RIO) reported record global iron ore shipments of 247 million metric tons (Mmt) for 2012 despite severe weather disruptions and a significant maintenance shut-down during the year.
Although the company has been hit by lower prices for its key output, management remains committed to expanding production of iron ore from the Pilbara region of Australia.
Global iron ore production for the full year was 253 Mmt, of which Rio Tinto’s share was 199 Mmt. That represents a 4 percent increase over 2011 levels. Although Rio Tinto’s overall output profile is diversified, iron ore represents more than 70 percent of earnings.
Management had forecast 2012 output of 250 Mmt of iron ore. Attributable iron ore production in the fourth quarter was 51.95 Mmt, better than a consensus estimate from analysts of 50.6 Mmt.
In his comments on the result CEO Tom Albanese noted that Rio Tinto “achieved record annual iron ore production and shipments as our expansion programme continues on schedule.”
Production gains were realized even as iron ore prices plunged in 2012 to USD85 per metric ton. Rio Tinto reported a 22.4 percent decline in 2012 first-half earnings to USD5.9 billion from USD7.6 billion a year ago, as prices for iron ore, copper and aluminum fell and costs at its operations climbed. Management plans to cut operating costs by more than USD5 billion by the end of 2014 and will cut exploration spending by USD1 billion during 2013.
Rio Tinto will report full financial results for 2012 and provide details of its final dividend for the year on Feb. 14, 2013.
Iron ore prices have now rebounded by nearly 80 percent since a September 2012 near-term low to a 15-month high around USD150, as signs of an economic recovery in China, the world’s biggest iron ore importer, continue to gather.
Production of iron ore from the key Pilbara region was 239 Mmt in 2012, of which Rio Tinto’s share was 191 Mmt, 4 percent higher than a year ago and good for another annual record.
Full-year 2012 sales of 233 Mmt were 3 percent higher than 2011, and fourth-quarter sales of 63 Mmt set a new fourth-quarter record, 2 percent higher than in 2011. Sales increased quarter over quarter throughout 2012, driving a company record for annual sales volumes despite significant market volatility.
Current capacity in the Pilbara has risen from 225 million metric tons per annum (Mmtpa) at the start of 2012 to 237 Mmtpa through de-bottlenecking and productivity improvement with “minimal capital spend.”
The expansion of Rio Tinto’s Pilbara infrastructure to support 290 Mmtpa of production by the end of this year and 360 Mmtpa by the first half of 2015 remains on track.
Early this year Rio Tinto’s Pilbara ports were closed for 87 hours due to Tropic Cyclone Narelle passing down the West Australian coastline. Despite the closure of the ports for shipping, the mine sites, and rail haulage from mine sites to port, continued to operate at full capacity throughout this period.
The head of Rio Tinto’s iron ore unit, Sam Walsh, had said that short-term factors such as re-stocking by steel mills and commodity traders as well as the onset of cyclone season in Western Australia were behind the recent uptick in iron ore prices. Mr. Walsh, speaking to The Australian, emphasized the cyclical nature of the iron ore market and reiterated Rio Tinto’s commitment to cutting costs.
Offering somewhat more detail on the future of iron prices are analysts for The Goldman Sachs Group Inc (NYSE: GS), who suggest that the key steel input will see another year of “exceptional prices” before supplies start to outpace demand, JPMorgan Chase & Co (NYSE: JPM) and Deutsche Bank AG (Germany: DBK, NYSE: DB).
Goldman Sachs sees iron prices averaging USD144 in 2013, up from a prior estimate of USD140, before declining to USD126 in 2014, USD90 in 2015 and USD80 in 2016. JPMorgan boosted its 2013 estimate to an average USD130 from USD110, while Deutsche Bank forecast prices may climb to USD170 in the first half before falling below USD120.
Total mined copper production for 2012 was up 6 percent in 2012 compared to 2011 due to expected recovery in ore grades at Kennecott Utah Copper and the Escondida mine in Chile. Refined copper production improved at Kennecott Utah Copper following scheduled smelter maintenance during the second quarter.
Production of copper contained in concentrate at Kennecott increased through the second half of 2012 due to the expected recovery in ore grades, with fourth-quarter production 26 percent higher than the fourth quarter of 2011.
Molybdenum production was lower than the third quarter and corresponding periods in 2011, reflecting lower grades due to mine sequencing. Management expects grades to recover in early 2013.
Mined copper production at Escondida in 2012 was 38 percent higher than 2011, and fourth-quarter production was 33 percent higher than the fourth quarter of 2011. Improvements were driven by an expected recovery in ore grades and increased ore delivered to the concentrator.
Construction of the Oyu Tolgoi copper-gold project in Mongolia is 99 percent complete as of Jan. 15, 2013. Mining and stockpiling of first ore began in April 2012.
On Nov. 5, 2012, Rio Tinto announced that Oyu Tolgoi had signed a binding agreement with a Chinese power company for the supply of electricity to the project. Commissioning of the ore-processing equipment began in mid-November. First ore was processed through the concentrator on Jan. 2, 2013. First concentrate production will follow within one month, and commercial production is expected to commence by June 2013.
Bauxite and alumina production in 2012 were 11 percent and 12 percent higher than 2011, driven by increased third-party demand for bauxite and expanded refining capacity at Yarwun. Aluminium production was 10 percent lower than in 2011, as ramp-up to normal capacity continued following resolution of the Alma labor dispute.
Thermal coal production for the full year was 16 percent higher than in 2011, reflecting increased plant capacity at Bengalla, the continued ramp-up at Clermont and the reversal of one-time disruptions in the fourth quarter of 2011.
Hard coking coal production was 9 percent lower than in 2011 due to the impact of planned maintenance and a major preparation plant shutdown as part of a mine expansion project.
In response to the persistently strong Australian dollar, declining coal prices and higher input costs Rio Tinto “is actively reducing controllable costs” in its coal business.
Titanium dioxide feedstock production for the full year increased 11 percent from 2011 following a successful furnace rebuild and an increase in volumes attributable to Rio Tinto from Richards Bay Minerals.
Among Australian analysts currently covering Rio Tinto 12 rate the stock a “buy”, while four rate it a “hold” and one rates it a “sell.” The average 12-month price target from 12 of the 17 analysts is AUD74.25.
Since hitting a 12-month closing low of AUD48.63 on the Australian Securities Exchange (ASX) on Aug. 30, 2012, Rio Tinto has enjoyed a solid rally. The stock reached a post-low peak of AUD69.25 on Jan. 3, 2013, but has been in mild decline from that point, closing at AUD65.55 on Jan. 16.
Rio Tinto is currently yielding 2.7 percent. Despite its commodity-price related problems in the first half of 2012 management boosted the interim dividend by 34 percent to USD0.725 per share.
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