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Rio Tinto’s Diamonds & Minerals Division: Why Lower Volumes?

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Diamond & Minerals

This segment for Rio Tinto (RIO) is going through a rough patch. While titanium dioxide feedstock and uranium demand remains weak due to high inventories, rough diamonds are also facing demand weakness due to lower demand from India and China (FXI)(MCHI), high inventory, and very low trade manufacturing margins. It’s therefore important to look at RIO’s approach to volume growth and the outlook for this division.

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Diamond production is weak

  • RIO operates through three diamond assets: Argyle, Diavik, and Murowa. Diamonds produced at Argyle were 34% higher year-over-year (or YoY) in 1H15. This is due to the continued ramp-up of production from the underground mine.
  • Diavik’s production, on the other hand, declined by 9% YoY due to lower ore availability as mining progressed through an area of higher dilution and the absence of stockpiled ore.
  • The Murowa mine in Zimbabwe produced 77,000 karats in 1H15, a decline of 50% YoY. Rio announced the sale of its interest in Murowa mine on June 26, 2015.
  • Uranium production was 95% higher YoY in 1H15 as Energy Resources of Australia (or ERA) didn’t process ore during 1H14 due to a leach tank failure.

Aligning production with market demand

  • Diamond underground production is ramping up at Diavik and Argyle, which should support production going forward. Management also mentioned that the diamond business is well positioned to take advantage of a medium-term recovery.
  • For titanium dioxide feedstock production, management is trying to align production with market demand. To achieve this goal, RIO has taken two furnaces at Sorel offline and is going for temporary shutdowns at Havre-Saint-Pierre.
  • RIO maintained its production guidance for diamonds at 20 million karats for 2015. It lowered its production guidance for titanium dioxide slag to 1.2 million tons from 1.3 million tons previously. It also lowered its uranium production guidance to ~5 million pounds, which comes at the lower end of its previous guidance of 5 million–6 million pounds.

While Rio Tinto and BHP Billiton (BHP)(BBL) have exposure to different product groups, Vale SA (VALE) and Cliffs Natural Resources (CLF) are largely iron ore plays.

ETFs that invest in these companies—like the iShares MSCI Global Metals & Mining Producers ETF (PICK)—provide diversified exposure to the metals and mining sector. Combined, BHP Billiton, Rio Tinto, and Vale contribute to 33.2% of PICK’s assets.

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