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Third Quarter Operational Review By Rio Tinto – What Can Investors Expect?

|About: Rio Tinto plc (RIO)

Summary

In its operational review the company recorded share increases in production and shipments of iron ore.

The copper segment of the company also recorded phenomenal growth during the first nine months of the current year.

Bauxite segments recorded declines, while aluminum remained flat during the said period. Rio Tinto continues to expand production in the hope that demand in the Chinese market will pick up.

The financial results for the first half of 2014 were exceptional, with improvements in almost every aspect financially.

Upon the release of its third quarter and nine month operational review, Rio Tinto (NYSE:RIO), it was noted that the company recorded share increases in production and shipments of iron ore, which were in line with its plans to expand iron ore mines previously. The copper segment of the company also recorded phenomenal growth during the first nine months of the current year, relative to last year's operational review in the same time frame. On the other hand, bauxite segments recorded declines, while aluminum remained flat during the said period.

Rio Tinto's Operations Review

The total iron ore production for Rio Tinto was recorded at 216.2 million tons, and this was 11% higher relative to the results recorded in 2013. Most of the increase in iron ore production stems from the company's expansion in production in the Pilbara facility during the month of May. These mines account for nearly 95% of the company's iron ore production.

Iron ore shipments of the company were 18% higher and came in at 220.4 million tons. The shipments were higher that production owing to stock ups in inventory before the Pilbara project port expansion and development took place.

Copper production also registered an increase of 15% during the nine month period and production was noted at 474,700 tons. Better recovery from the Utah operations of the company, along with expansion of productions in the Oyu Tolgoi mines led to this rapid growth. Production guidance with respect to copper has been increased for the year to nearly 615,000.

Bauxite production registered a 2% decline during the nine month period. However, the production during the third quarter was 7% higher compared to the second quarter, indicating that the company was trying to improve and ramp up its production from the Gove mines, after it curtailed operations at the Gove refinery.

Aluminum did not record any growth in production and was in line with last year's results. The closure of the Shawinigan smelter and Kitimat smelter last year were two of the primary reasons that caused this flat growth despite the productivity gains that were noted by this segment.

Coking coal growth remained flat, while thermal and semi-soft coal was three percent lower than last year's results. This is a positive for the company considering the sale of the Clermont mine which caused the company to lose a significant amount of production as a result of that. The output from the Hail Creek and gains in productivity kept the business going.

The exploration and evealuation expenditure during these nine months amounted to $566 million.

Glencore and Rio Tinto merger rumors

Word in the market is that Glencore PLC has approached Rio Tinto for talks of a potential merger. The merger could be worth almost $150 billion, leading to the former combining its commodity training skills with the iron ore assets of the latter. Details about the structure of this deal were undisclosed for the public, but premiums are expected to be high. This deal, from the perspective of Rio Tinto, could allow the company to gain free net cash flow, while expanding its operations with the help of a trading company as well. However, for investors, this might not be such great news at iron ore margins stand to be diluted as a result of this deal. Asset sales, as a result of this deal, could be forced upon by regulators.

However, this news was put to rest when more up to date news resurfaced about Rio Tinto turning down the offer for a merger. However, Glencore is now weighing up the offer to bid again next year with a better offer that could possibly be considered.

Potential Monopoly Investigation

Rio Tinto and BHP Billiton face the risk of being investigated under anti-monopoly rules as both giants struggle to protect their share in the market for iron ore. Both companies are at the risk of breaching international trading rules and deliberately expanding production to squeeze out competition from the market. Rio Tinto has specifically been working on expanding production, even as iron ore prices have declined by 40% relative to last year. This would not be the first time that the company came under scrutiny by international regulators for anti-monopoly activities.

Iron Ore Price Volatility

Iron ore prices have been displaying a downward trend since last year as market supply for iron ore outweighs demand. Demand from China has experienced a slowdown. Given that the country accounts for nearly 60% of seaborne shipments of iron ore in the world, this slowdown in demand exerts pressure on many iron ore companies like Rio Tinto.

Rio Tinto is known to have invested billion in iron ore production expansion, mainly because they are banking on iron ore demand to pick up in the future. Citigroup has forecasted iron ore prices to fall to about $80 per ton by 2016, which could prove to be highly damaging to mining companies. If Rio Tinto is able to generate the cost savings that it targets to make every year,. Chances are that the rapid fall in iron prices may not affect the company as drastically as being anticipated. Nevertheless, the drop in iron prices is not something that should be brushed off by the company, especially when mining companies continue to flood the market with ramped up iron ore production activities.

Financial Results

The business displayed their financial strength after they reported their financial results for the first half of 2014. The company was able to increase their underlying earnings by 21% to about $5.1 billion. This translated into earnings per share of about 276.8 cents. Net earnings for the company jumped by a phenomenal 156% and were recorded at $4.4 billion.

The company expects to continue with its cost reductions and bring savings up to about $1 billion by the end of 2015. Cash flow from operations of the company increased by 8% and was recorded at $8.7 billion. Capital expenditure during the first half witnessed a decline and was recorded at $3.6 billion. It expects to spend about $8 billion annually starting from 2015.

The company expects global iron ore shipments to be recorded at 300 million tons for the current year. Production for the year is expected to be recorded at 295 million tones. The production targets for aluminum and bauxite are expected at 3.4 million tons and 41 million ton respectively. Mined copper production is expected to come in at 585,000 tons for the year. Refined copper production is forecasted at 300,000 tons for the year.

Conclusion

Given that the operational review has shown the company's muscles in its capability to control what it produces, it also sheds light on the growth prospects of the company, given that demand for the company's products with pick up in the future. Financially, the company has also displayed its strength and its future guidance indicates that it continues to expect better results to come in, in the future.

The 52 week low for the share came in at $2,926.50, while the 52 week high for the share was at $3,680.56. Given that the company is currently trading near its 52 week low, and because it has high hopes to continue growing in the future and provide its investors with better results, investors should consider these stocks as good investment opportunities that are not only likely to grow, but are also value stocks as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.