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Could Rio Tinto’s 2016 Iron Ore Guidance Be a Stretch?

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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’ strategy to raise their volumes to reduce pressure on revenues, cash flows, and ultimately bottom lines.

In this part of our series, we’ll see how Rio’s volumes are progressing in iron ore.

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Volume growth

Rio Tinto’s production for 1H16 rose by 11% year-over-year (or YoY) to 136.3 million tons. Production for 2Q16 was 68.9 million tons, or 8% higher YoY.

The run rate of Pilbara sales for 2Q16 was 330 million tons. That’s slightly lower than the run rate needed to hit the annual guidance. Sales were higher than production mainly due to the drawdown of inventories.

Guidance maintained

  • Rio maintained its guidance for ~330 million tons on a 100% basis of global shipments for 2016 from its operations in Australia and Canada. This is subject to weather conditions.
  • In order to hit its guidance, Rio would need a run rate of 335 million tons per annum in the second half of 2016, which might be a bit of a stretch.
  • Rio announced in 1Q16 that the delay in AutoHaul means that production from Pilbara for 2017 will be between 300 million and 340 million tons.
  • The above guidance is subject to final productivity and capital expenditure plans.

Additionally, 61% of Rio’s sales for the first half of 2016 were made on a CFR (cost and freight) basis and the remainder on an FOB (free on board) basis. The company achieved realized prices of $44.50 per wet ton FOB for the first half of 2016.

Rio has the lowest costs of all iron ore producers in the world and is placed favorably on the industry cost curve to weather the current downturn.

Vale SA (VALE) and Cliffs Natural Resources (CLF) will release their 2Q16 results on July 28, 2016. BHP Billiton (BHP) will release its fiscal 2016 results on August 16, 2016. To learn more about expectations from CLF’s 2Q16 results, please read Cliffs Natural Resources: Will 2Q16 Results Be Positive Surprise? Cliffs forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

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