Rio Tinto Iron Ore Output Eases, Profit Focus

Rio Tinto Plc. (RTP) Wednesday said its booming Australian iron ore operations face continuing cost pressures, with fourth quarter production easing from record levels at a time when global demand remains strong.

The company, one of the world's three largest iron ore miners that recently struck a 9.5% price rise with Chinese steel mills, said output from its key Hamersley operations fell 2% in the final three months of 2006 compared with the record third quarter. Rio Tinto and rivals BHP Billiton and Brazil's CVRD account for about 70% of the seaborne global iron ore trade, with each scoring huge windfall profits in recent years amid the China growth surge.

"Global iron ore demand remained strong in all markets during 2006," the company said. Annual output from its Pilbara iron ore operations in Australia's remote northwest has been affected by extreme weather conditions early in the year and then by the challenge of recovering while operating at full capacity.

"Ongoing acute shortages of mining inputs in the region continue to put pressure on costs," the company added.

Rio Tinto is spending US$1.35 billion to expand its Pilbara operations with the aim of lifting port capacity to about 200 million tons a year by the end of 2007.

Commenting on the mixed fourth quarter production report, ABN AMRO analyst Rob Clifford said he is likely to revise his earnings estimate for Rio Tinto down but only marginally. The positives and negatives from the quarterly report largely cancel each other out, Clifford said.

Daiwa Securities mining analyst Mark Pervan said many market watchers had been hoping to see Rio Tinto's iron ore expansions paying off in the fourth quarter.

"They did flag they were having problems overcoming that big disruption in the first quarter but you would think they would have been past that by the fourth," he said.

Higher grades at the Grasberg mine in Indonesia saw mined copper production for the quarter rise 15% on the September quarter when strikes at Escondida in Chile cut output.

However, refined copper output slipped 29% due to scheduled maintenance shutdowns at the Kennecott smelter in Utah.

Macquarie Equities analyst Brendan Harris said the quarterly report is largely in line with his expectations, with disappointments in some areas made up by gains in others. "If anything it is slightly better than we anticipated," he said.

"The big disappointment for some is going to be that iron ore hasn't kicked ahead - I didn't think it was going to but some out there were hoping for it."

Rio Tinto's shares dipped after the report was released, ending down 1.7% at A$71.30 but off a low of A$71.01.

Most analysts still expect Rio Tinto to post a record full year profit of more than US$7.5 billion, up from US$5.2 billion in 2005. The profit result is due Feb. 1.

Rio Tinto said thermal coal production in the U.S. was a record 32.80 million tons in the fourth quarter, 3% higher than in the third quarter. Australian thermal coal output edged 2% higher but hard coking coal output fell 12% due to lower volumes at the Kestrel mine in central Queensland.

Rio's Comalco Alumina refinery in Queensland reached nameplate capacity during the quarter as planned, but overall alumina output dropped 3% compared to the third quarter after the sale of the miner's interest in the Eurallumina operations.