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Rio Tinto suffers decline in output

July 19, 2011

“Rio Tinto revealed a steep decline in output at the world’s largest copper mine, demonstrating the mining industry’s difficulties supplying enough copper to keep up with rising global demand. In the first six months of the year Rio’s share of copper production at Escondida, the Chilean mine that accounted for 7 per cent of global production last year, fell 23 per cent to 118,000 tonnes over the same period in 2010.

The drop at Escondida – whose ownership is split between BHP Billiton, Rio, and Mitsubishi – dragged the miner’s total copper output lower by 18 per cent to 273,000 tonnes. Rio, which published its mine-production report on Thursday, disclosed the drop ahead of BHP, the larger partner at Escondida. The production report came ahead of the big miners disclosing their financial results for the first half.

Copper’s deteriorating supply base has helped push the price of the red metal above $9,000 per tonne this year. Analysts expect supply-side problems to influence Rio’s and BHP’s earnings from copper, despite the high profit margins they are enjoying.”

Source: Financial Times, July 15 2011

Observations:

  • Iron ore, thermal coal, and bauxite production increased by 12%, 18%, and 11% respectively compared to the same quarter last year. Main productivity issues are in copper (-24%) and coking coal (-26%).
  • Rio quotes lower grades at the Escondida and Kennecott copper operations as the key reason for the drop in copper production. Weather conditions are the key reason for lower coking coal production.

Implications:

  • Rio Tinto has a very strong portfolio of copper projects, but grades of remaining ore in many old projects is rather low. Other companies mining similar types of deposits face the same issue, resulting in both higher production costs and lower production with the same equipment fleet.
  • Iron ore remains the single key driver of Rio Tinto’s financial performance. Production at the key operations of Pilbara and Hamersley increased. With current commodity prices the company is likely to try to increase capacity at both iron ore and (new) copper operations as fast as possible.

©2011 | Wilfred Visser | thebusinessofmining.com

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