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Rio Tinto Adjusts Diamond & Minerals Production to Reflect Demand

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Diamond & Minerals

Rio Tinto’s (RIO) Diamond & Minerals segment is going through a rough patch. While titanium dioxide feedstock and uranium demand remain weak due to high inventories, rough diamonds also face demand weakness due to lower demand from India and China (FXI)(MCHI), high inventory, and very low trade manufacturing margins. So it’s 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 37% higher year-over-year (or YoY) in 9M15 and 43% higher YoY to 3,514 karats. This is due to the continued ramp-up of production from the underground mine.
  • Diavik’s production, on the other hand, declined by 14% YoY in 9M15 and 24% YoY in 3Q15. This was due to lower processing volumes and lower recovered grades.
  • Rio announced the sale of its interest in the Murowa mine on June 26, 2015.
  • Uranium production in 3Q15 was 17% higher quarter-over-quarter due to higher mill head grade, improved recoveries, and increased throughput.

Lowering guidance

  • RIO lowered its production guidance for diamonds to 18 million karats against previous guidance of 20 million karats for 2015. This decision means to align production with current weak market demand. To achieve this balance, final product processing in the fourth quarter at Argyle will pause.
  • For titanium dioxide feedstock production, management is also trying to align production with market demand. To achieve this goal, RIO has taken two furnaces at Sorel offline and it’s going for temporary shutdowns at Havre-Saint-Pierre.
  • The company maintained production guidance for titanium dioxide slag for 2015 at 1.0 million–1.1 million tons. 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 SPDR S&P Global Natura; Resources (GNR)—provide diversified exposure to the metals and mining sector. Combined, BHP Billiton and Rio Tinto are 6.7% of GNR’s assets.

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