- Major miner flags trade disruptions, "food protectionism" and the energy crisis as current challenges
- Production varied across divisions, with some downgrades for the second half
Major miner Rio Tinto (RIO) suffered the double hit of lower prices and lower production in the first six months compared to last year, and warned of uncertainty over China’s industrial recovery. The price of its key product, iron ore, is dependent on a healthy Chinese economy, and on Friday the country's National Bureau of Statistics announced June quarter GDP growth of just 0.4 per cent, the lowest since Q1 2020.
Iron ore has already plunged by a third to under $100 (£84) a tonne in recent weeks as steel prices have come down off the back of weakening global demand and continued high export numbers from China.
Rio said economic stability was a focus of Xi Jinping’s government but “headwinds are considerable from restricted labour and goods movement and a slowing external environment”.
Its iron ore production for the first half was 151mn tonnes, down 2 per cent on last year. Copper and bauxite production were both up on last year, with copper driven by a stronger June quarter. Guidance for the rest of the year has been maintained for everything but alumina, aluminium and diamonds, as Covid-19-related absences hit a Queensland smelter.
RBC Capital Markets analyst Tyler Broda said the cost figures and operational performance did not bode well for the upcoming earnings figures. "The lower iron ore realised prices ... provisional pricing for copper and the guidance downgrades in aluminium all are likely to combine to reduce consensus estimates heading into the half year results," he said.
"Another period with a lack of operational momentum doesn't help in this type of market," he added.
Iron ore sales will get a boost in the second half from production starting at the new Gudai-Darri mine.
There are challenges further down the project pipeline, however, with Rio needing to convince communities in the US and Serbia it should be allowed to build the Resolution Copper and Jadar mines, respectively, while work has stopped on the Simandou iron ore project in Guinea after the government withdrew a previous development agreement.
The combination of costs rising at mines and expansion projects and falling metals prices means Rio's earnings bonanza of recent years looks to be over. Hold.
Last IC View: Hold, 5,705p, 23 Feb 2022
