Rio Tinto share price slides as analysts predict steep drop in iron ore production will hit profits

Published On: April 22, 2022Categories: Stocks & Shares2.8 min read

The Rio Tinto share price fell by 4.8% to £58.50 yesterday after analysts revised their profit forecasts for the miner, one of the world’s biggest, down. The more negative outlook is based on a steep drop in the quantities of iron ore being produced by Rio’s Western Australia mines.

Over the first three months of the year the miner shipped 71.5 million tonnes of iron ore from its mines in Australia’s Pilbara region. That represented a 15% decline on quantities sold over the final quarter of 2021 with RBC mining analyst Tyler Broda labelling the performance a “weak first-quarter production result”.

The drop in production was attributed, in part, to “increased Covid-19 cases on-site in the Pilbara”, and other regions of Australia Rio operates mines in. Covid-19 infection rates have risen across the country as its borders have reopened and internal travel restrictions eased. Australia has had one of the world’s strictest lockdown policies during the pandemic with borders essentially closed for almost two years. There have also been numerous city and region-wide lockdowns enforced to contain the spread of the virus.

As well as iron ore Rio Tinto’s mines also produce other commodities including copper, aluminium, and bauxite. The miner has suffered from a number of scandals around its environmental and governance practices over its recent history.

The most damaging has been the 2020 destruction of an ancient Aboriginal site considered holy by Australia’s indigenous population to extend one of its Pilbara mines. However, that was recently run close by the publication of a damning external report into Rio’s workplace culture that revealed multiple instances of widespread sexual harassment and other issues to have taken place at its remote locations.

Rio produced 13.6 million tonnes of bauxite, which is refined to make alumina, which is then further processed to turn it into aluminium, of which 736,000 tonnes was sold. The amount of bauxite was up 4% on the same quarter a year earlier. 125,000 tonnes of copper also came out of the company’s mines as well as titanium dioxide slag; an substance used in products from toothpaste to paints.

However, it is the Pilbara iron ore business that is Rio’s primary profit driver and analysts are concerned at the miner’s struggles to meet output targets. Chief executive Jakob Stausholm conceded the company “needs to lift [its] operational performance”.

Rio is striving to open new mines but their progress has been delayed by a combination of labour shortages and supply chain delays. It is hoped new facilities will help improve “steel fabrication quality”, which has become a source of dissatisfaction for management. Criticism has been centred on the company’s new $2.7 billion Gudai-Darri mine, at which iron ore production is planned to imminently start. There have also been “commissioning challenges” at the Robe Valley mine.

Stausholm told investors yesterday that the miner will be “better placed to produce additional tonnes of Pilbara Blend”, once both new sites have started production in the second half of the year. The signature steel is Rio’s best-selling product.

He reassured that production volumes will be stepped up and should allow for between 320 million tonnes and 335 million tonnes of iron ore to be shipped this year despite the challenges of the first quarter. However, some analysts believe that forward guidance to be overly optimistic given the backdrop of operational issues. Around 322 tonnes shipped has been put forward as more realistic. It is also feared the average price Rio will be able to realise from its iron ore shipments will drop due to the declining quality of product from ageing mines.

Mr Broda believes that will see underlying earnings of $26.4 billion for the year against his previous forecast for $27.9 billion. That would represent a drop of around $10 billion on figures posted for 2021.

About the Author: Jonathan Adams

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