Rio Continues Adjusting Diamond Production to Reflect Demand


Jan. 27 2016, Updated 7:05 p.m. ET

Diamond & Minerals segment

Rio Tinto’s (RIO) Diamond & Minerals segment is going through a rough patch. While titanium dioxide’s feedstock and uranium’s 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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Stable mineral production

Rio Tinto operates through three diamond assets. They are Argyle, Diavik, and Murowa. Diamonds produced at Argyle were 47% higher YoY (year-over-year) in 2015 and 43% higher YoY at 13.5 million carats. This is due to the continued ramp-up of production from the underground mine.

Diavik’s production, on the other hand, fell by 11% YoY in 2015 and 3% YoY in 4Q15. This was due to pauses in the processing plants and the absence of stockpiled ore. This was done mainly to align the production with current weak market demand.

Rio announced the sale of its interest in the Murowa mine on June 26, 2015. Uranium production in 2015 was 72% higher YoY. This mainly reflected the complete shutdown of processing facilities in the first half of 2014 due to the failure of a leach tank.

Aligning guidance with market demand

  • RIO’s guidance of 21 million carats for diamonds implies a YoY growth rate of 21% in production for 2016.
  • For titanium dioxide’s feedstock production, the 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 has guided for an 8.2% fall YoY in production for 2016.
  • Rio’s uranium production guidance for 2016 is between 5 million pounds and 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 Natural Resources (GNR), provide diversified exposure to the metals and mining sector. When combined, BHP Billiton and Rio Tinto equal 6.7% of GNR’s assets.


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