April 20, 2017

Rio Tinto has cut production guidance for copper by 12 per cent following problems at two giant mines where it is involved in joint ventures, and reported lower than expected output from its flagship iron ore business because of bad weather.

The Anglo Australian mining group had previously predicted it would mine between 525,000 and 665,000 tonnes of copper this year.

But in a trading update late on Wednesday, Rio said it now thinks it will produce between 500,000 and 550,000 tonnes because of supply disruptions at the world’s two biggest copper mines — Escondida in Chile and Grasberg in Indonesia.

Output at Escondida — operated by BHP Billiton and in which Rio has a 30 per cent stake — was hit by a 43-day strike that ended last month.

Meanwhile, production at Grasberg has been affected by a dispute between the Indonesian government and Freeport-McMoRan, the operator of the mine, in which Rio has a 40 per cent stake.

The revised guidance for copper came as Rio said it had shipped 76.7m tonnes of iron ore, a key steelmaking ingredient, in the three months to the end of the March — a result that was lower than many analysts had expected.

However, Rio retained its full-year production guidance for iron ore — its most profitable business — at 330m to 340m tonnes, saying its Australian operations, which were hit hard by heavy flooding, were now operating to plan.

“These results do not materially change our view on the stock,” said Paul Gait, analyst at Bernstein Research. “The operational performance was weaker this quarter, but this was largely driven by short-term issues and seasonal trends.”

Iron ore production in the first quarter of the year is often weak because of seasonal weather patterns in Australia. Last week, Fortescue Metals Group, another big Australian producer, reported a decline in iron ore shipments in the three months to the end of March.

Traders say these supply disruptions helped drive the iron ore price up to $90 a tonne earlier this year. The commodity’s value has since fallen back to $65.

One Rio shareholder said the company’s trading update highlighted some of the issues facing its copper business, where production has been declining in recent years.

Rio produced just 84,200 tonnes of copper in the first quarter of this year, down 37 per cent compared with the same period in 2016. Its share of output from Escondida plunged 66 per cent to 27,200 tonnes.

Rio said it expected Escondida to be producing at full capacity again in July, while the Indonesian government is set to grant Freeport a temporary export permit as it attempts to settle a row over new mining regulations, according to analysts.

Jakarta banned shipments from Grasberg in January after Freeport refused to adopt a new mining licence that would force the company to give up international arbitration rights and sell a 51 per cent stake in its Indonesian operations.

In the light of these proposals, Rio has said that it is thinking carefully about whether to continue its partnership at Grasberg.

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