It wasn't a particularly exciting third quarter 2010 for Rio Tinto, with the combined production result if anything weighing on earnings forecasts and valuation. Compared to the second quarter, output was higher for alumina, coking coal, U.S. coal, refined copper, and iron ore. In fact, iron ore production was a record 47.6 million tonnes with ramp-up of Brockman 4 and Western Turner Syncline tonnages at Hamersley. But output fell for aluminium, Australian coal, mined copper, and diamonds. More importantly, the overall result was below expectations. The weighty aluminium and copper divisions underperformed and stronger iron ore was only a partial offset. Rio Tinto continues to run operations at close to or above capacity rates to take advantage of strong prices for products. If you're pushing to the limits, production assets can push back.
The third-quarter result weighs on earnings but is more than made up for by upgrades to our medium-term commodity price forecasts. We remain positive on Rio Tinto but maintain preference for BHP Billiton at the right price. We prefer the latter's more balanced asset portfolio. Rio Tinto is the darling at the moment though, with the shares still playing catch-up after their sin-binning post the Chinalco fiasco in 2009. The balance sheet is back in order, growth is firmly on the agenda and capital expenditure guidance of $13 billion over the 18 months to December 2011 reflects a re-found confidence. The fact that the Pilbara iron ore joint has failed is an added boost--the deal had grown increasingly in BHP's favour as time went by. BHP shares are also held back by the PotashCorp bid.
With respect to third-quarter production, Rio Tinto's aluminium declined marginally with weakness from the wholly-owned Canadian smelters. Alumina rose 5% to 2.3 million tonnes, strong performances from Gove, Vaudreuil, and Yarwun offsetting lower QAL output. Rio Tinto forecasts its fiscal 2010 share of alumina and aluminium at 9.4 million tonnes and 3.8 million tonnes, respectively. Alumina is key given alumina prices are likely de-coupling from aluminium. In a presentation this month, Alcoa CEO Klaus Kleinfeld said his company was successfully concluding alumina volumes for 2011 using a monthly average of a basket of different published alumina prices. A change is coming for the positive!
Mined copper fell 5% to 160,000 tonnes due to lower grades at Escondida. Refined output improved 18% to 107,000 tonnes with greater efficiencies at the Kennecott, Utah smelter. Rio Tinto forecasts its fiscal 2010 mined and refined copper at 660,000 tonnes and 380,000 tonnes, respectively. This compares unfavourably with 805,000 tonnes and 410,000 tonnes in fiscal 2009 and is lower than we had anticipated. Declining grades are a common theme in the copper industry. LME stocks have fallen a third from 550,000 tonnes to 375,000 tonnes and copper's price is again looking to test $4 per pound. It would be nice to take better advantage of the opportunity, but it's a case of cause and effect.
