Mining problems at its huge operation in the Pilbara means Rio Tinto will not get the full benefit of the surge in iron ore prices which rose to yet another five year high Wednesday of $US114.08 a tonne.
In a statement released overnight Wednesday, the company said that as a result of these problems, its iron ore guidance would now be 320 to 330 million tonnes, down from the April guidance of “at the lower end” of the range provided in February at the full year results of 338 million to 350 million.
Rio shares fell more than 4% in London and will fall here today when the ASX re-opens.
At the same time the company’s mining and production costs will jump, meaning profits for the June quarter and full year will not be as buoyant as analysts think.
The news of the expected shortfall and that of extra tonnage coming from a closed mine in Brazil after a court order yesterday will pressure global prices and Rio’s share price.
The financial impact will mean Rio could lose more than $US2 billion in revenues this year if the shortfall is around 20 million tonnes. It could be as high as 30 million, meaning the revenue forgone could be $US3 billion or more.
The company has also been receiving lower payments for lower quality ore sent in the current June quarter to customers, especially in China.
The fall in production means the company also faces the extra impact of higher costs this year than forecast, meaning a crimp on expected revenue and profit growth.
The revised April guidance was after the impact of Cyclone Veronica and two fires – one in January and one in March at the company’s Port lambert loading terminals in the Pilbara.
The impact of the so-called “operation challenges” described in the statement is two-fold – more lower grade fines and lump (under the contracted 62% Fe figure for instance) and lower shipments of Pilbara Blend fines and lump.
Rio notified customers of the problems around a week ago and the news had an immediate impact on prices with the news adding to projections of supply shortfalls through the next few months.
Rio said in its statement:
“Rio Tinto Iron Ore is currently experiencing mine operational challenges, particularly in the Greater Brockman hub in the Pilbara. This is resulting in a higher proportion of certain lower grade products, partly to protect the quality of our flagship Pilbara Blend.
“Around 1.5 million tonnes of these products were sold in the first quarter, as noted in the 2019 Quarterly Operations Review, 16 April 2019. Additional sales of these products will be made in 2019.
“In light of these challenges, there has also been a review of mine plans, resulting in guidance of Pilbara shipments (100% basis) for 2019 being revised to between 320 million tonnes and 330 million tonnes (previously between 333 million tonnes and 343 million tonnes).”
Rio said that given the change in volume guidance, unit costs will be updated in the Q2 Quarterly Operations Review on 16 July. The company had been targeting costs around $US13 a tonne this year.
The problem at the 90 million tonne a year Great Brockman operation are believed to be the production of too much low-grade material that could not be used in its flagship Pilbara blend product, which Chinese steel mills want because of its consistent quality and low impurities. This saw Rio review of its mine plans and the downgrade.
It will produce less product to maintain the quality of the Pilbara Blend exports.
On top of this global supplies are expected to improve because Vale, the big Brazilian iron ore miner, has won a court challenge to lower court rulings that had stopped wet processing of ore at its Brucutu mine which is Vale’s largest mine in its southern mining system.
Wet processing had necessitated the use of the mine’s tailings dam and that was stopped in the wake of the January 25 dam wall disaster that left nearly 300 people dead or missing.
A previous court ruling had allowed Vale to use dry processing at the mine, which saw around 8 million of the mine’s 30 million tonnes of capacity come back on stream. Now the remaining 22 million tonnes a year operation will be back online by this weekend, according to Vale.
It will take time, but the extra tonnage will add to the growing shipments Vale is making from its larger and more productive northern mines in Brazil and will make up for the shortfalls from Rio Tinto.
Rio’s statement will be released by the ASX this morning. Rio shares closed at $105.71 on the ASX on Wednesday. The shares are up more than 34% so far in 2019, surging with the rising iron ore price.