Rio Tinto shares matched their London fall of more than 4.5% on Wednesday in the Australian market yesterday in the wake of its second downgrade in iron ore production guidance for this year in three months.
Rio shares fell 4% to $101.47 while were off BHP shares lost 1.5% but recovered to close down just 0.3% at $40.85 while Fortescue shares were down 2.5% at one stage before rebounding to end at $8.72, off 0.4%
Investors concluded that after the initial knee jerk sell move, the problem was all Rio’s. In fact, some analysts wonder if the real story is that Rio is pushing too hard in the Pilbara – the two fires and now this mining stuff up at Brockman Hub are operational not marketing or problems with Chinese demand.
Operational problems are the direct concern of management. The two cause of the two fires at the two Cape Lambert export terminals this year have never been properly explained. Why did they happen so close together after so many years without a fire?
The problems from Cyclone Veronica have been easily explained – weather and beyond company control and now the problems at the Brockman Hub are to do with the mining process and therefore a managerial concern that will cost a lot of money to straighten out.
Rio Tinto revealed in a statement released overnight Wednesday is experiencing iron ore mine operational problems, particularly in the Greater Brockman hub in the Pilbara, leading the miner to cut its shipments forecast from the area for 2019.
Rio says the challenges are from a higher proportion of certain lower grade products, partly to protect the quality of its flagship Pilbara Blend.
The miner cut its forecast for 2019 Pilbara shipments on 100% to between 320 million tonnes and 330 million tonnes, from between 333 million tonnes and 343 million tonnes.
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 revenues and earnings from its main cash cow, the Pilbara iron ore mines.
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 “operational 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.