Rio Tinto Results: Rio hits accelerator at Pilbara iron ore business, eyes UPPER END of guidance

Rio says it could hit top half of iron ore guidance in Pilbara
Refined copper guidance down on Kennecott delay
Big acceleration in spending at Simandou as Rio, Guinea, Chinese move closer to infrastructure agreement

Rio Tinto (ASX:RIO) is set to hit the upper end of its 2023 Pilbara iron ore guidance in a big turnaround for the mining giant after years of missed guidance fuelling conservatism on its growth prospects.

After hitting guidance by shipping 322Mt in 2022, the world’s biggest iron ore exporter says it is on track to hit the upper half of its 320-335Mt range after exporting 161.7Mt in the first half of the year.

Typically a fast finisher, Rio’s numbers are up 7% on the first half last year despite a train derailment in June and major maintenance at the Port of Dampier.

Its Pilbara ops produced 81.3Mt, up 2% QoQ and 3% YoY, in June, but saw shipments fall 4% QoQ andf 1% YoY to 79.1Mt, suggesting bottlenecks are clearing at its mines.

Rio has long term plans to ramp up to 360Mtpa out of the Pilbara, with its 43Mtpa Gudai-Darri mine hitting its nameplate capacity during the quarter.

A ramp up in lower grade SP-10 production in the second half is also expected to help as Rio targets an accelerated schedule from July to December.

Elsewhere its Oyu Tolgoi copper and gold mine is continuing to ramp up, but a conveyor failure at the Kennecott Smelter and maintenance at Escondida saw Rio’s copper tonnages fall 1% YoY to 145,000t.

“We built further momentum in our Pilbara iron ore business for the quarter, and now expect to deliver shipments in the upper half of our guidance range for the year,” Rio CEO Jakob Stausholm said.

“The ramp-up of the Oyu Tolgoi underground mine progressed ahead of plan, and we remain on track to more than triple its copper production by the end of the decade.

“Production downgrades during the quarter highlight that we still have much more to do elsewhere, as we roll out the Safe Production System to create stability and achieve excellence across our global portfolio.”

Rio has cut its guidance at the Iron Ore Company of Canada from 10.5-11.5Mt to 10-11Mt after wildfires in northern Quebec saw production fall 21% YoY on 3.5 weeks of lost production.

Bauxite production will end up at the lower end of Rio’s 54-57Mt guidance range and alumina was adjusted down from 7.7-8Mt to 7.4-7.7Mt, while its refined copper guidance has been cut to 160-190,000t from 180-210,000t and costs up from US160-180c to US180-200c on a one-month delay to the completion of the Kennecott rebuild to September.

Rio Tinto (ASX:RIO) share price today:

Bullish on iron ore output, copper to struggle

Rio’s bullishness on its iron ore exports places the iron ore market itself in an interesting place as the year unfolds.

Prices fell 12% across the June quarter with Chinese steel demand subdued as its property sector and broader economy faced headwinds that snuffed out the momentum from its Covid reopening.

But iron ore prices have risen sharply in recent days on hopes stimulus measures will help revive Chinese infrastructure investment in the wake of weak economic data.

At over US$113/t iron ore prices are at historically strong levels. But Rio itself reveals supply is on the rise.

“Seaborne iron ore supply performed strongly over the quarter, with June shipments from Australia and Brazil estimated at or close to all-time highs,” the miner said.

Supported by issues in accessing scrap for electric arc furnace steel production and domestic iron ore output, Chinese imports fell below the 1.25Bt annualised rate set in the March quarter, but trended close to record seasonal levels, Rio said.

Rio pulled in average realised prices of US$101.9/dmt FOB in the second quarter of 2023, compared to US$112.3/dmt FOB in the March term. At US$107.2/dmt for the first half, Rio clung close to the Platts 62% Fe index average of US$109.8/dmt.

Is the Simandou development getting nearer?

Rio has also revealed a massive ramp up in spending on the massive Simandou iron ore project in Guinea, where it is in partnership with a host of Chinese-led groups and the local government, currently controlled by a military junta.

Its pre-tax and divestment exploration and evaluation expenditure increased 93% year on year to US$710 million, US$318m or 45% of that incurred at Simandou amid a ramp up of early works.

“At the Simandou iron ore project in Guinea, negotiations continued to progress to enable the co-development of rail and port infrastructure by Simfer, Winning Consortium Simandou and the Guinean State,” Rio said.

“The legal framework for the construction and operations phases will establish access rights, fiscal regime and schedule, as well as joint venture arrangements.

“We also continued to progress early works, including establishing accommodation camps to support continued mobilisation on both our mine and rail scope, earthworks and geotechnical drilling.”

While that is reported on a 100% basis (Rio only owns a ~45% share in two of the four blocks), it shows how serious early works are getting on the long delayed project.

With overall costs some analysts have estimated at over US$15b, it would bring anywhere between 60-200Mtpa of high grade DSO iron ore into the seaborne market by later this decade by developing rail and port infrastructure to extract and ship 65% pure hematite from the Guinean jungle.

Other Rio exploration spending occurred in central exploration (18%), its minerals division (17%), 15% in copper and 4% in iron ore.

Greenfield exploration remains around US$250m, with copper and battery minerals a focus. Alongside its Rincon brine lithium project in Argentina, where Rio is reviewing potential cost blowouts on a US$140 million estimate for a pilot plant, it is farming into projects owned by juniors in WA and Canada to get into lithium at the ground level.

“Short-term uncertainty remains as the global economy slows and higher interest rates dampen consumer spending, although the automotive market sentiment improved in China on the back of tax incentives for EVs and a potential end to the aggressive price war between Chinese car manufacturers,” Rio said of lithium carbonate pricing.

“Longer term, market fundamentals for lithium remain strong, as EV adoption continues to rise on supportive government policies and supply shortfalls requiring further investment.”

Meanwhile, Rio has yet to give up on its stalled Jadar lithium and borate project in Serbia, cancelled last year on complaints from the local community.

“We continue to believe that the Jadar lithium-borate project in Serbia has the potential to be a world-class asset, that will support the development of other future industries in Serbia, acting as a catalyst for tens of thousands of jobs for current and future generations, and sustainably producing materials critical to the energy transition,” Rio said.

“We are focused on consultation with all stakeholders to explore options related to the project’s future.”