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Rio’s Iron Ore Volume Guidance Might Have an Upside

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Iron ore volumes

Iron ore volumes are key to Rio Tinto’s (RIO) iron ore segment revenue. The other factor, seaborne iron ore prices, is determined by demand and supply dynamics that are currently pressuring prices. In this scenario, it’s the big iron ore miners’ stated strategy to raise their volumes to reduce the pressure on revenues, cash flows, and ultimately bottom lines. In this article, we’ll see how Rio’s volumes are progressing in iron ore.

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Strong volume growth

RIO’s production for 2015 rose by 11% year-over-year (or YoY) to 327.6 million tons. Production for 4Q15 was 87.2 million tons, or 10% higher YoY.

Global iron ore shipments of 336.6 million tons were marginally lower than the year’s guidance of 340 million tons. Shipments were higher than the production by 9 million tons due to the draw-down of inventories.

The second half production was strong following the completion of the brownfield developments and expanded infrastructure in the Pilbara.

The Iron Ore Company of Canada also demonstrated much improved operational performance. Its 4Q15 production rose by 20% YoY. This was due to improved haul truck and mill availability and enhanced productivity rates.

Conservative guidance?

  • RIO guided for ~350 million tons (on a 100% basis) of global shipments for 2016 from its operations in Australia and Canada. This is subject to weather conditions.
  • The company’s iron ore volume guidance seems a little conservative. The market was expecting it to be around 360 million tons.
  • Most of Rio’s iron ore stockpile was worked through the fourth quarter of 2015, implying that its sales and production shouldn’t be much different going forward.

Additionally, 59% of Rio’s 2015 sales were made on a CFR (cost and freight) basis and the remainder being FOB (free on board). The company achieved realized prices of $48.4 per ton FOB for 2015.

While Rio’s 2016 iron ore guidance is slightly lower than market expectations, it’s in keeping with its CEO’s views of no curtailment in iron ore production to correct the current supply and demand mismatch. Rio has the lowest cost as an iron ore producer in the world and is placed favorably on the industry cost curve to weather the current downturn.

Vale SA (VALE) will release its 4Q15 results in February 2016 while Cliffs Natural Resources (CLF) will release its 4Q15 results on January 27, 2016. Cliffs is experiencing lower iron ore shipments due to lower export volumes and lower demand from steelmakers in the United States (SPY) (IVV). Cliffs forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

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