In its third production report released today, Australia's premier iron ore miner, Rio Tinto Limited (ASX: RIO) has once again posted record production of the steel-making ingredient.
In a statement on the ASX, CEO Sam Walsh said: "We have delivered another strong quarter with record iron ore production and a solid performance in copper and aluminium. We have seen our first full quarter from the 290Mt/a iron ore expansion in the Pilbara, with the additional tonnes going into premium Pilbara Blend production. Our strategy of focusing on long-life, low-cost assets means we will continue to generate strong cash flows despite a lower price environment, resulting in materially increased and consistent cash returns to shareholders."
Highlights from Rio's 3Q report include1:
- Iron ore shipments (100% basis) up 18%
- Global iron ore shipments of approximately 300 million tonnes (100% basis) (production of 295mt)
- Mined copper up 15%
- Bauxite down 2%
- Aluminium production flat
- Titanium dioxide feedstock down 11%
- 360 million tonnes per annum infrastructure now 75% complete
- Increased FY14 copper production guidance
- Slight reduction in FY14 Alumina production guidance
- Exploration and evaluation expenditure down 26%
1Figures are nine months of 2014 versus prior corresponding period of 2013
It was pleasing to see Rio increase its copper guidance, on the back of a recovery at Bingham Canyon (following a pit wall slide) and increased production at Oyu Tolgoi, in Mongolia. Although it was somewhat expected.
Overall, I think the report was good and operationally points to a stronger future for Rio. Iron ore shipments are expected to reach 300 million tonnes this year as around 5 million tonnes of iron ore inventory is expected to be drawn down from Pilbara mines.
The Pilbara expansion is on track for completion for the first half of next year, with production set to exceed 330 million tonnes in 2015. As the company puts it, "The 360 Mt/a project is expected to generate significant value for shareholders."
Buy, hold, or sell?
Iron ore has fallen nearly 40% throughout 2014 but Rio has some of the best mines in the world, in terms of cost efficiency and ore quality. Their scalability is a result of a superior supply chain and investment in automated technology. Ultimately, this affords Rio an estimated breakeven cost of just $US43 per tonne. This compares to a spot price of $US84 per tonne yesterday.
Whilst risk-averse investors would be advised to avoid iron ore miners altogether, no doubt some will find solace in the fact that Rio has been in existence for over 100 years and is rapidly paying down debt and cutting costs, to prepare for a lower price environment. If I were going to buy any iron ore miners, it'd be Rio or the more diversified BHP Billiton Limited (ASX: BHP).
