Rio Tinto struggles to hit iron ore guidance after tough quarter

Rio Tinto faces a battle to achieve full-year guidance for its flagship iron ore business after heavy rain, labour shortages and a new approach to cultural heritage issues hit shipments.

In a quarterly update on Friday, the world’s biggest iron ore producer said it exported 76.3m tonnes of the steelmaking ingredient in the three months to June, down 12 per cent on the same period a year ago.

Chief executive Jakob Stausholm said Rio had faced “some challenges” at its Pilbara operations in Western Australia, including materially higher rainfall and coronavirus-related labour shortages that hampered its ability to bring replacement mines into its system.

In addition, Rio lost 2m tonnes of iron ore production as it changed buffers and exclusion zones to protect areas of “high cultural significance”. These changes followed last year’s Juukan Gorge scandal, when ancient aboriginal rock shelters were destroyed by the expansion of a Rio mine.

As a result, the company expects iron ore shipments to be at the low end of its 325m to 340m tonne guidance range, a target analysts said would be tough to meet.

“We believe something below the bottom end of the range is more likely as a very strong second half [of the year] would be needed to hit the targeted range after first-half shipments were just 154m tonnes,” said Christopher LaFemina, Jefferies analyst.

Rio’s comments, however, will provide another prop for iron ore prices, which have surged over the past year and hit a record of above $230 a tonne, delivering a huge windfall for the company and rivals BHP Group, Vale and Fortescue Metals Group.

Analysts expect Rio to declare a huge dividend payment of about $8bn when it reports half-year results this month.

Iron ore is Rio’s main commodity and source of profits. Over the past year the market has been bolstered by strong demand from China and tepid supply growth as Rio and peers have struggled to get material to market. 

In Friday’s update, Rio also revealed higher production costs at its Pilbara operation. Each tonne of iron ore mined in Australia this year will cost up to $18.50 per tonne to produce, up from a previous forecast of $16.70 to $17.70. These figures exclude shipping costs and royalty payments to governments.

“The change reflects price escalation of key input costs (diesel and labour), costs related to mine heritage management,” Rio said.

On Oyu Tolgoi, Rio’s behind-schedule copper project in Mongolia’s Gobi Desert, the miner said development had been affected by the pandemic and it still needed to reach an agreement with the government on a number of outstanding issues before underground caving could start.

Oyu Tolgoi is Rio’s most important growth project and at peak production will be one of the biggest copper mines in the world.

Rio also provided an update on its South African mineral sands business, which produces ilmenite, rutile and zircon — materials used in everything from paint and smartphones to sunscreen. 

Rio shut Richards Bay Minerals last month and declared force majeure on contracts citing the deteriorating “security situation” around the operation in KwaZulu-Natal, the home state of former president Jacob Zuma. In May, RBM’s general manager Nico Swart was ambushed and shot dead by gunmen on his way to work.

With all operations curtailed, Rio has suspended production guidance citing “risks around the timing of resumption of operations”.

“All things considered, it was clearly a challenging second quarter for Rio,” said LaFemina.