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Why Rio Tinto Downgraded Its 2016 Copper Production Guidance

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Aug. 8 2016, Updated 10:06 a.m. ET

Copper and diamonds

Average copper prices fell by 21% in 1H16 to average 213 cents per pound. Improvements in cost structure help miners lower their costs of doing business, which is vital in a depressed commodity price environment. Miners such as BHP Billiton (BHP) (BBL), Freeport-McMoRan (FCX), Teck Resources (TCK), and Peabody Energy (BTU) are leaving no stone unturned in further optimizing their cost structures.

In this article, we’ll have a look at Rio Tinto’s (RIO) cost performance and realized prices for this division. BHP and RIO form 6.7% of the SPDR S&P Natural Resources ETF (GNR).

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Copper segment

  • Lower prices affected the Copper and Diamond business.
  • These price falls affected the division’s underlying earnings by -$236 million YoY (year-over-year).
  • Another $114 million fall was mainly due to non-cash asset write-downs following the completion of an asset review at Rio Tinto Kennecott.
  • While sales volumes were lower for copper, gold, and molybdenum, this was offset by cost savings at Kennecott and Oyu Tolgoi.
  • Over $140 million in cost savings were achieved, but savings were offset by lower volumes and a decision to process lower grade stockpiles at Escondida.
  • Despite lower prices, RIO’s Copper and Diamonds segment was free-cash-flow (or FCF) neutral during 1H16.

Guidance update

Rio Tinto previously guided for refined copper production of 220,000–250,000 tons. The midpoint of this guidance implied a rise of 10% YoY. The expected production for mined copper has been downgraded slightly, as the company is seeing delays in accessing high-grade material at its Grasberg open pit.

Guidance is now 545,000-595,000 tons compared to 575,000–625,000 tons. Following its reorganization, Rio Tinto changed its diamond guidance from 21 million carats to 18 million–21 million carats.

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