Rio Tinto recorded second-quarter production gains in most major commodity groups compared with the first quarter. This was generally close to, if marginally shy of, expectations. In particular, coal showed strong gains from the maintenance and weather-affected first quarter. Coking coal extraction from Hail Creek mine in Australia came from a higher-yielding seam, and heavy equipment additions helped. Improved plant reliability at Kestrel boosted production rates there. Other Australian coal operations enjoyed improvement across the board, including first output from the new Clermont mine.
Copper and uranium fell considerably short of the mark. Kennecott Utah Copper suffered lower grades and a 19-day smelter shutdown. This was only partially offset by higher output from Escondida and lesser mines. Well-flagged scheduling issues crimped uranium production from ERA's Ranger mine, with rain exacerbating. Iron ore and aluminium generally close to levels anticipated.
We retain our positive view, with no change to our valuation. The shares are yet to fully recover from the Australian government's petroleum resources rent tax fiasco, and opportunity remains.
CEO Tom Albanese is sticking to the same themes, saying, "2010 continues to shape up well for Rio Tinto and we are driving our operations at close to capacity. Markets for most of our products are strong and the overall long term demand outlook is positive. But in recent weeks, fears about a possible double-dip recession in OECD countries and a slight slowdown in Chinese growth have led to some weakening in sentiment. We believe this pattern of volatility in the global economy is set to continue." The statement sounds generally positive with an element of a bet each way.
A return to growth is key for Rio Tinto. The company has restarted work on a fourfold expansion of Iron Ore Company of Canada's concentrate capacity to 22 million tonnes per year. Cost to Rio Tinto is $235 million. It will also invest $470 million building the Kennecott Eagle nickel and copper mine in the US. And in a seemingly well-timed political statement on profit taxes, it will spend $200 million preparing for further expansion to Western Australia iron ore operations to 330 million tonnes per year. Enough of the uncertainty introduced by the resource super profits tax has apparently been removed with the Australian government's replacement mineral resource rent tax proposal. (Read this article for more on the impact of the tax proposal.)
One point of caution pertains to the already struggling aluminium unit. Low snow and rain levels in Quebec are expected to affect hydro generation, necessitating power purchases or production curtailment. Rio says the impact is likely to be $100 million. This is nothing too serious in a division that is adding little at the moment.
