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Why Did Rio’s 2015 Copper Production Come in below Expectations?

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Copper operations and production

Copper volumes are key for companies that produce copper. In this article, we’ll look at Rio Tinto’s (RIO) copper production profile. Rio Tinto (RIO) has three main copper assets, namely Kennecott Utah, Escondida, and Oyu Tolgoi. Copper production at Kennecott for 2015 was 92,000 tons, and that’s 55% lower year-over-year (or YoY). The fall is mainly due to de-weighing and de-watering going on at the site. The production in 4Q15, however, was 16% higher quarter-over-quarter, mainly due to higher ore grades.

The production at Escondida surprised on the downside as 4Q15 production fell by 26% YoY. This is mainly attributable to lower grades and throughput.

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Production at Oyu Tolgoi in Mongolia rose by 36% YoY to 67,800 tons for 2015. This is mainly due to higher grades and throughput. Production in the second half of 2015 showed marked improvement. This is in line with management’s comments last quarter. The company’s management stated that since mining has started moving to areas of higher grade in the open pit, copper production in the second half should be higher than in the first half.

Rio’s Oyu Tolgoi mine also took an important step in December 2015 as a project financing agreement of $4.4 billion was signed. Now, the board approvals and permits remain the next critical step for Oyu Tolgoi.

Guidance update

Rio guided for refined copper production to come between 220,000–250,000 tons. The midpoint of guidance implies a growth of 10% YoY.

In December 2015, Rio’s CEO had mentioned that if a copper asset was available at a reasonable price, then Rio could buy it. He said, “Long-term copper fundamentals remain strong and Oyu Tolgoi as a tier one asset will be a globally important source of supply as the market moves back into structural deficit over the next few years.”

While copper could move to a structural deficit in the next few years, the current overcapacity and faltering demand are weighing negatively on copper producers such as BHP Billiton (BHP)(BBL), Freeport-McMoRan (FCX), Teck Resources (TCK), Southern Copper (SCCO), and Turquoise Hill Resources (TRQ). Freeport announced several survival measures in December 2015, including production cuts and dividend (DVY) suspension.

Investors looking at a diversified exposure to the materials sector can also consider the iShares US Basic Materials ETF (IYM). Almost 12% of IYM’s holdings are invested into metals and mining companies.

For more on copper, visit Market Realist’s copper page.

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