uploads///Diamonds

Analyzing Rio Tinto’s Diamond Production for 1H16

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Jul. 26 2016, Updated 8:04 a.m. ET

Rio’s Diamond & Minerals segment

Rio Tinto’s (RIO) Diamond & Minerals segment is going through a rough patch. 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

On June 21, 2016, Rio Tinto announced the restructuring of its asset divisions. Diamonds will be clubbed with the copper segment for reporting purposes.

Rio Tinto operates through two diamond assets: Argyle and Diavik. Rio announced the sale of its interest in its third diamond asset, the Murowa mine, on June 26, 2015.

Diamonds produced at Argyle were 4% higher YoY (year-over-year) in the first half of 2016 at 6.9 million carats. This is due to the continued ramp-up of the underground mine, which results in the processing of higher ore volumes. To some extent, this was offset by lower grades.

Diavik’s production, on the other hand, fell by 5% YoY in the first half 2016 and 16% YoY in 2Q16. This was due to lower grades, which was partially offset by higher ore availability. The planned maintenance shutdown in the plant during the second quarter also impacted production.

Aligning guidance with market demand

  • Following its reorganization, Rio Tinto changed its diamond guidance from 21 million carats to 18 million–21 million carats.
  • For titanium dioxide’s 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 has maintained its guidance for an 8.2% fall in production YoY for 2016.
  • Rio maintained its uranium production guidance for 2016 at 5 million–6 million pounds.

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, including the SPDR S&P Global Natural Resources ETF (GNR), provide diversified exposure to the metals and mining sector. Combined, BHP Billiton and Rio Tinto make up 6.7% of GNR’s assets.

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