1Q18; not a bad result
Rio Tinto (ASX:RIO) has headed into 2018 with a solid first quarter operational result ended 31 March 2018. In describing the company’s performance for the March quarter, Chief executive officer J-S Jacques stated “we delivered a solid operational performance;” an assessment we agree with. Iron ore was again the mainstay for the quarter while copper finally showed some life.
Operational guidance for 2018 was left unchanged, apart from one minor downgrade.The following table shows the company’s quarterly operational results:
Source: Rio Tinto (ASX:RIO)
The company’s key business in its iron ore operations, again delivered for the quarter after turning in a solid increase in production. Copper for the quarter was a standout performer with diamonds also performing well. Again, parts of the aluminium operations disappointed. The two coal types reported mixed performances, while some of the company’s minor product offerings motored along for the quarter.
Overall however, we consider the company’s first quarter operational performance as a good one, given the firm trading environment and better state of the global economy. Moreover, in maintaining production guidance for 2018 across all its product offerings, except one, indicates to us that the company remains within its 2018 expectations.
The company’s key iron ore operations were not the standout, as seen in previous years, for the reported quarter, but did however deliver a very respectable result. Iron ore production rose by 7.9% compared to the same quarter in 2017, to 71.4 million tonnes. The following chart shows quarterly iron ore production:
Source: Rio Tinto (ASX:RIO)
The company’s Pilbara mines were the main driving force, following the reporting of an 8.5% rise in production to 69.1 million tonnes.
This was a good result given operations in the Pilbara can be impacted by seasonal wet weather. The Hamersley group of six mines (Rio Tinto does not fully own all the Hamersley mines), and the company’s biggest producing block, reported a 10.2% increase in iron ore production compared to the March quarter 2017, to 53.6 million tonnes. The result was driven by few weather related events in the region over the quarter.
Iron Ore Company of Canada (IOAC, Rio Tinto’s interest 58.7%) reported a fall in iron pellet production for the quarter of 8.3% on the same quarter in 2017, to 2.4 million tonnes. Driving the result was an unplanned shutdown of onsite infrastructure.
Iron ore guidance for 2018 remained unchanged with global iron ore shipments expected to be in the range of 330 million to 340 million tonnes (100% basis).
The company shipped 330.1 million tonnes (100% basis) of iron ore in 2017. IOCA is forecast to produce in the range of 10.3 million to 11.3 million tonnes of iron ore pellets and concentrate, which is a downgrade from the previous target of 11.5 million to 12.5 million tonnes.
Copper production has been somewhat of a challenge for the company with recent quarterly production numbers coming in all over the place. The following chart shows quarterly refined copper production:
Source: Rio Tinto (ASX:RIO)
The March quarter however did show some resilience, following the reporting of a 47.6% increase on the same quarter from a year earlier, to 56,100 tonnes. Driving the result was the company’s Escondida mine (Rio’s interest 30%) where a strike severely crimped production in the March 2017 quarter. Escondida delivered 20,800 tonnes of refined copper for the reported quarter, representing a rise of 155% on the strike impacted March quarter 2017. Kennecott added a cameo performance with the reporting of an 18.5% increase on the March quarter 2017, to 35,300 tonnes. Driving the result was infrastructure availability and efficiencies.
Mined copper also reported an improvement in operations for the reported quarter. Overall, production jumped 66% compared to the March quarter 2017, to 139,300 tonnes. Escondida reported a jump of 235% on the same quarter in 2017, to 90,900 tonnes of mined copper. The previous years’ March quarter result was impacted by staff strikes.
Refined copper production guidance for 2018 remained unchanged and is forecast to be in the range of 225,000 tonnes to 265,000 tonnes. Mined copper production for 2018 is forecast to be in the range of 510,000 to 610,000 tonnes.
In 2017, the company produced 197,200 tonnes of refined copper and 478,100 tonnes of mined copper.
Thermal coal production for the reported quarter rose by 11.9% on a like-for-like basis compared to the same quarter for 2017, to 1.1 million tonnes. The following chart shows quarterly thermal coal production (unadjusted for mine sales):
Source: Rio Tinto (ASX:RIO)
The company sold its interest in three thermal coal mines, removing 3.2 million tonnes of production that appeared in the year earlier result. The mines sold were Hunter Valley (1.9 million tonnes), Mount Thorley (450,000 tonnes) and Warkworth (845,000 tonnes).
On a like-for-like basis, the better result was driven by improved productivity at the company’s Hail Creek (Rio Tinto’s interest 82%) operation, following the reporting of a 21% increase in production compared to the same result from a year earlier, to 1.1 million tonnes. The previous quarters’ production numbers for Hail creek was impacted by mine sequencing changes. The company’s Kestrel (Rio Tinto’s interest 80%) reported a fall over the same comparative period as Hail Creek, to 59,000 tonnes. driving the Kestrel result was a longwall changeover and maintenance activities.
Total hard coking coal production fell by 30% compared to the same quarter in 2017, to 1.1 million tonnes. The following chart shows quarterly coking coal production:
Source: Rio Tinto (ASX:RIO)
Both the Hail Creek and Kestrel mines reported lower production numbers for the quarter. Hail Creek turned in an 18% drop in production of hard coking coal when compared to the same quarter in 2017, to 758,000 tonnes. Lower yields because of mine scheduling drove the result. Kestrel reported a 47% fall in production compared to the March quarter 2017, to 344,000 tonnes. The same longwall changeover and maintenance that impacted thermal coal production drove the lower outcome.
Guidance for thermal and coking coal production in 2018 remained unchanged and is forecast to be in the ranges of 3.8 million to 4.5 million and 7.5 million to 8.5 million tonnes respectively.
In 2017, the company produced 13.9 million tonnes of thermal and 7.7 million tonnes of hard coking coal.
The aluminium complex continues to be a problem, with two product offerings reporting lower output for the quarter. The company has worked hard to maximise the operations of the aluminium segment, with chequered results to date. The following charts show quarterly production for both bauxite (left graph) and alumina (right graph):
Source: Rio Tinto (ASX:RIO)
The upstream operation in bauxite and midstream alumina reported divergent results for the quarter. Bauxite production for the reported quarter rose 12% compared to the March quarter 2017, to 12.7 million tonnes. The company’s two major bauxite producers in Gove and Weipa, both reported higher numbers. Gove increased production by 31% and Weipa by 7.8% when compared to the same quarter of 2017, to 3.1 million and 7.4 million tonnes respectively. Both sites gained on production efficiencies and infrastructure improvements.
Midstream alumina production for the reported quarter fell by 2.8% when compared to the corresponding 2017 quarter, to 846,000 tonnes. The production number was impacted by maintenance.
Downstream aluminium reported a 4.8% fall in production compared to the same quarter in 2017, to 2.0 million tonnes. The following chart shows quarter aluminium production:
Source: Rio Tinto (ASX:RIO)
Driving the result were events at the company’s Dunkerque and Becancour (Rio’s interest 25%) smelters that negatively impacted the results of each site. Dunkerque reported a 27% fall on the same result from a year earlier, to 51,000 tonnes and Becancour a 52% fall, to 10,000 tonnes. The Dunkerque smelter has now been sold.
Production guidance for the aluminium complex in 2018 remained unchanged. Bauxite production is forecast to be in the range of 48 million to 51 million tonnes, alumina in the range of 8.0 million to 8.2 million tonnes and aluminium 3.5 million to 3.7 million tonnes.
In 2017, the company produced a record 50.8 million tonnes of bauxite, 8.1 million tonnes of alumina and 3.6 million tonnes of aluminium.
Diamonds turned in a good result for first quarter of 2018, with the printing of a 11.2% increase on the same quarter in 2017, to 4.6 million carats. The following chart shows quarterly diamond production:
Source: Rio Tinto (ASX:RIO)
Driving the result was the Argyle mine following the reporting of a 17.7% increase on the same quarter in 2017, to 3.6 million carats. Better plant availability on improved weather and the processing of higher grade ore drove the result.
Partially offsetting the Argyle fall was the company’s Diavik mine (Rio’s interest 60%), following the reporting of a 6.3% fall when compared to the March quarter 2017, to 1.1 million carats. Driving the result were lower diamond recoveries and grades.
Guidance for diamond production in 2018 is forecast to be in the range of 17 million to 20 million carats, and remained unchanged.
In 2017, the company produced 21.6 million carats.
The company’s subsidiary, Energy Resources Australia (ERA, Rio’s interest 68%) reported lower uranium production for the March quarter. The following chart shows quarterly uranium production:
Source: Rio Tinto (ASX:RIO)
Uranium production fell by 3.7% when compared to the same quarter in 2017, to 1.5 million pounds of uranium. The ERA mine reported a 26% fall in production compared to the March quarter 2017, to 667,000 pounds. The continued processing of low grade ore and plant maintenance drove the lower result for the quarter. Production of uranium from the Rössing mine (Rio’s interest 69%) reported a rise of 26% on the same quarter in 2017, to 848,000 pounds. Processing efficiencies on higher grades drove the better result for the quarter.
The uranium production target for 2018 remained unchanged in the range of 6.2 million to 7.2 million pounds.
In 2017, the company produced 6.7 million pounds of uranium.
Overall, the operational numbers for the first quarter of 2018 were, in our view, satisfactory. The fact that the company maintained 2018 production guidance across all of its key product offerings, provides us with some comfort that operations is expected to have a net positive impact on the company’s financial results. The company will report its 2018 first half result on 1 August 2018.
Turning to the daily chart, initial support is sighted at the 50-day moving average (red line) of $77.84, followed by structural support of $74.75 (horizontal dashed-blue line), should the bears emerge over the near-term. Positively, and from a broader standpoint, the share price of Rio Tinto remains above both the 50 (red line) and 200 (green line) day moving averages, which signal’s medium-term momentum to remain tilted in favour of the bull-camp. For this reason, and from a probability perspective, an eventual challenge of the February intra-month high of $82.73 (horizontal red line) would be the more likely route, moving forward.
The shackles were released somewhat in the March quarter, with exploration expenditure charged to the profit and loss account rising for the first time in a while. Exploration expenditure came in at US$101 million for the reported quarter, compared to US$78 million for the same quarter in 2017. Central exploration consumed approximately 47% of the amount spent, copper and diamond exploration consumed 37%, energy and minerals 7% and remaining 9% was spread across iron ore and aluminium. We believe Rio Tinto has sufficient tier 1 assets that can generate future brownfield growth, without having to spend significant exploration dollars. We are however pleased that the tide to explore may be coming in.
Rio Tinto (ASX:RIO) has a strong balance sheet and ample free cash flow that positions the company to take advantage of its brownfield opportunities, and when required greenfield investing.
With reference to the monthly chart, resistance was respected at the 61.8% Fibonacci retracement (thin-red set of retracements) of $68.98 in February 2017. This led to a short-term correction to unfold until May 2017, which has now terminated. Moving forward, we would expect prices to gravitate towards a band of resistance evident between $85.76 and $89.04. This is made up of the long-term 61.8% Fibonacci retracement (solid-red set of retracements) and the February 2011 resistance level respectively. A definitive clearance of this price range would likely boost upward momentum and result in a gradual ascent towards the next resistance range sighted between $102.65 and $103.32. This consists of the long-term 78.6% Fibonacci retracement (solid-red set of retracements) and the 127.2% Fibonacci extension respectively.
We expect the underlying market pricing fundamentals for commodities will remain positive over the remainder of 2018 and into 2019, which adds positive financial leverage on top of operational gains. We expect the company will continue to generate a strong free cash flow in 2018 and maintain a strong balance sheet.
Consequently, our recommendation for Rio Tinto (ASX:RIO) as a buy for Members with no exposure to the company remains unchanged.
Disclosure: Rio Tinto (ASX:RIO) is held within the Fat Prophets Concentrated Australian Share, Concentrated UK Share and Mining & Resources portfolios.
