Heavy rains sink Rio's production targets

AUSTRALIA'S summer drenching continues to affect Rio Tinto, which has cut full-year coal, bauxite, alumina and iron ore production guidance as its mines gradually return to full capacity.

While the downgrades are not huge, they show that the heavy rains caused more problems than were predicted as late as April, when guidance was given.

"Operations largely recovered from the severe weather impacts earlier this year, although some port and rail constraints remained," Rio chief executive Tom Albanese said yesterday.

He warned that not all of the commodity price gains of the quarter would flow through to Rio's bottom line when first-half profit was reported next month. "This quarter was also characterised by continued strong prices for most of our metals and minerals, but with worsening adverse exchange rates and some input cost pressures," he said.

In its second-quarter production report, Rio met expectations in its all-important iron ore unit, but came in below analysts' forecasts in coking coal, bauxite, aluminium and diamonds.

It appears the market had been betting on a slightly worse outcome than analysts, but Rio's shares rebounded from around $80 before the report was released to finish flat at $80.95.

Rio changed iron ore production guidance from 244 million tonnes to "in excess of" 240 million tonnes and dropped hard coking coal guidance by 1.3 million tonnes to 8 million tonnes.

Bauxite guidance dropped 700,000 tonnes to 35.8 million tonnes and alumina by 200,000 tonnes to 9.2 million tonnes. At current spot prices, this could represent more than $US1 billion ($930 million) of revenue, but it will have little impact on Rio's expected 2011 revenue of $US70bn. At Rio's iron ore unit, which is expected to represent three-quarters of Rio's estimated $US20bn profit this year, second-quarter production jumped 17 per cent to 48.85 million tonnes, just shy of the record 50.05 million tonnes reached in the last quarter of 2010.

Including joint venture partners' production share, Rio's Pilbara operations produced 58.96 million tonnes for the quarter, which equated to an annual rate of 236 million tonnes.

This was well above the nameplate capacity of 225 million tonnes a year, despite the June death of a scaffolding contractor at Rio's Dampier port in Western Australia.

The company says it is planning to make a decision early next year on whether to expand to 333 million tonnes a year. It has already approved plans to go to 283 million tonnes a year.

Rio's hard coking coal production rose 9 per cent from the previous quarter to 1.78 million tonnes, but was still down 26 per cent from a year earlier.

Rio lifted force majeure at its Hail Creek coking coalmine in Queensland on May 12.

Macquarie analyst Lee Bowers said he expected the production report to result in a 2-3 per cent cut in his first-half earnings forecast of $US8.2bn.

Market consensus was about $US9bn, he said.