Rio Tinto sees inflation with costs up and tonnes down as iron ore price scales record heights

Is inflation coming to hit the hip pockets of Australia’s big iron ore miners?

For years the big players have used cost discipline (and arguably advantageous bargaining positions when it comes to wages after culling thousands of jobs in the downturn) to keep their iron ore empires ticking along, with costs in the mid-teens for each tonne of ore mined.

Now they are benefitting from a period of historic prices, you can probably expect that to tick up.

Rio Tinto (ASX: RIO) has flagged an extra $300 million of costs from its Pilbara iron ore operations related to higher labour and diesel costs and changes to its mine heritage management following the Juukan Gorge debacle.

That will lift its 2021 costs from the Pilbara iron ore operations above guidance of $16.70-17.70/t to $18-18.50/t.

As expected its Pilbara iron ore division underperformed relative to guidance in the June Quarter, with the 76.3Mt shipped down 12% on the same period in 2020 and 75.9Mt mined 9% lower than June last year. Rio produced 154Mt in the first half of the year, meaning a big ramp up will be needed through the second half to hit its 325-340Mt guidance range.

“We expect iron ore shipments to be at the low end of the guidance range which remains subject to COVID-19 disruptions, tie-in and ramp up of brownfield replacement mines and management of cultural heritage,” Rio said.

CEO Jakub Stausholm also blamed wet weather and Covid impacts on labour.

“The global economy, in particular China, recovered strongly and we are intensely focused on servicing our customers with as much product as we can. However, we faced some challenges in the first half notably at our Pilbara operations, which were impacted by replacement mine tie-ins and materially higher rainfall,” he said.

“Heightened COVID-19 constraints, which resulted in numerous travel restrictions, added further pressure on the business and limited our ability to access additional people, particularly in Western Australia and Mongolia, in order to deliver operational improvements or maintenance initiatives and accelerate projects.”

Prices received by Rio for its product climbed from US78.50 per wet metric tonne in the first half of 2020 to US$154.90/t in the first half of 2021 on an FOB basis, and up to US$168.60/wmt (US$183.20 per dry metric tonne) in the June Quarter as the benchmark 62% fines index hit monthly average records of over US$200/t.

That compared to the average first half price for the monthly average Platts index for 62% iron fines converted to an FOB basis of $172.6 per dry metric tonne.

Rio’s bauxite production was down 6% on the same period last year to 13.7Mt, but alumina production was steady at a tick over 2Mt, while aluminium production was up 4% on the same period last year to 0.8Mt and 2% on first quarter levels.

Realised copper prices, which also touched LME records in the quarter, rose from US$2.50/lb in the first half of 2020 to $4.15/lb in H1 2021 and US$4.42/lb in the June Quarter, with mined copper production 13% down YoY at 115,500t in the quarter.

RBC’s Tyler Broda said Rio would take a while to restore investor confidence after the damage from the Juukan Gorge scandal.

“Rio Tinto appears to be undergoing operational difficulties as the company emerges from the Jukaan Gorge scandal, but with the new management team in place we would expect that operations start to improve in the always easier H2,” he wrote in a note to clients.

“This said, it will likely take some time to restore investor confidence in the operations with many uncertainties still overhanging the business.

“The lower iron ore production could provide a boost to iron ore sentiment (as will likely VALE’s update next Wednesday), although the weak industry shipments in Q2 are one of the reasons why iron ore is at ~$220/t already.”

Minor notes

Zulti South, a major mineral sands mine in South Africa that has been impacted by social and political unrest, remains suspended.

Winu, Rio’s big new copper prospect in the Paterson province, is expected to receive WA EPA approval next year with first production in 2025, back from previous plans to produce copper there in 2023.

A new office has been established in Conakry Guinea to progress studies on Rio’s part of the Simandou iron ore deposit.