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How Could Rio Tinto’s Copper Production Pan Out Going Forward?

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Copper operations and production

Copper volumes are key for companies that produce copper. In this part of the series, we’ll look at Rio Tinto’s (RIO) copper production profile.

Rio Tinto has three main copper assets: Kennecott Utah, Escondida, and Oyu Tolgoi. Copper production at Kennecott for the first half of 2016 was 71.4 thousand tons, which is 62% higher year-over-year (or YoY). The increase is mainly due to mining progress through higher copper grade areas.

Refined copper production, however, was 26% lower YoY in 2Q16, as drawdown occurred in the comparable quarter last year.

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The production at Escondida in the first half of 2016 was 23% lower YoY due to lower copper grades. Rio stated that in June, the owners of Escondida approved upgrades to the Los Colorados concentrator to extend its life and related infrastructure. This will enable Escondida to run three concentrators in the near term.

Production at Oyu Tolgoi in Mongolia rose by 23% YoY to 36.6 million tons for the first half of 2016. This is mainly due to higher grades and throughput.

On May 6, 2016, Rio and its partners, the government of Mongolia and Turquoise Hill Resources, announced the next stage of Oyu Tolgoi mine development. After that, $4 billion worth of project financing has been drawn down.

Guidance update

Rio Tinto guided for refined copper production to be 220,000–250,000 tons. The midpoint of guidance implies a growth of 10% YoY. The expected production for mined copper also remains the same at 575,000–625,000 tons.

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. You should note that these stocks have performed very well year-to-date.

Investors looking at a diversified exposure to the materials sector can also consider the iShares US Basic Materials (IYM).

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

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