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Rio Tinto’s Aluminum Production: Is There an Upside?

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Aluminum production

Rio Tinto (RIO) and Alcan combined in 2007 to form Rio Tinto Alcan, a global leader in the aluminum industry. It’s fully integrated facilities include high-quality bauxite mines, large-scale alumina refineries, and some of the world’s lowest-cost aluminum smelters. A sustained rise or fall in aluminum shipments is a significant indicator that affects the stock value of aluminum producers such as Alcoa (AA), Century Aluminum (CENX), and Constellium NV (CSTM).

Alcoa currently forms 2.33% of the Materials Select Sector SPDR ETF (XLB) and 0.79% of the iShares North American Natural Resources ETF (IGE).

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Production in line

  • Rio’s bauxite production set a new first-half production record coming at 21.2 million tons, an increase of 5% year-over-year (or YoY). This was mainly due to strong performance at Weipa and ramp-up of Gove.
  • Alumina production was also up 5% YoY in 1H15 due to the improved productivity at Queensland alumina and Yarwun.
  • Aluminum’s production for 1H15 of 1.6 million tons was in line with the same period last year despite lower production at Kitimat as it prepared for the commissioning of a modernized smelter. Kitimat will ramp up towards its nameplate capacity of 420 thousand tons, expected to be completed by early 2016.

Opportunities going forward

  • RIO kept its guidance unchanged at 43 million tons for bauxite, 8 million tons for alumina, and 3.3 million tons of aluminum for 2015.
  • Going forward, the expansion of the Kitimat smelter’s ramp-up towards nameplate capacity of 420 million tons per year of production should help the company’s aluminum volumes.
  • A feasibility study is also ongoing for the 22.8 Mtpa South of Embley bauxite project, which is expected to be presented to the board for final approval be the end of 2015.

The company is also focusing on value-added products in aluminum, which should reduce the need for some of its customers to re-melt the material. This could lead to premium prices.

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