Is Rio Tinto really that bullish about the outlook for 2012?
In its third quarter operations review, released in early October of last year, CEO, Tom Albanese said the company had rebounded strongly from the first quarter damage done to iron ore and coal by floods and cyclones in Australia.
He then went on to temper his enthusiasm with this comment:
"Whilst we are mindful of current market volatility, the fundamentals are holding up well, particularly for bulk-traded commodities. We are operating at full capacity, selling all we produce and our growth programme is on track, supported by the strength of our balance sheet."
In yesterday’s 4th quarter and full year report for 2011, there was no such statement.
The report quoted Mr Albanese as saying
"This was another record-breaking year in the Pilbara with both quarterly and full year iron ore production and shipments beating previous achievements, as our expansion programme continues apace.
"Across the Group, production has bounced back from the severe weather conditions experienced in the first half which had the biggest impact on Australian iron ore, coal and uranium."
It’s as if the caution seen in the third quarter had vanished, even though the outlook for the global economy is not economy, especially Europe is not as optimistic and China continues to slow.
But with confirmation yesterday that the Chinese economy is still slowing (see above story), but not crashing, investors ignored the absence of any caution in Mr Albanese’s published comments and sent Rio shares up 1.2% to $65.70.
And like smaller rival, Fortescue Metal Group, which also reported yesterday, Rio rode the surge in Chinese iron ore imports in November and December, which jumped to more than 60 million tonnes a month (64 million in December), after slumping as low as 44 million tonnes a month or two earlier.
Rio doesn’t detail prices as Fortescue does, but it will not escape the slide in world iron ore prices seen in the 4th quarter.
Yesterday Fortescue said 4th quarter prices slumped to around $US122 a tonne from $160 a tonne in the third quarter.
Fourth quarter iron ore sales from the company’s Pilbara mines in WA rose by around two million tonnes to just over 61 million and for the full year total sales were 225.3 million tonnes, against 227 million tonnes in 2010.
That means Rio (which has a different pricing mechanism) will struggle to match the huge profits seen in the first half of the year, despite the record production and sales levels in the closing months of 2011.
Rio said yesterday that:
Record global iron ore shipments of 239 million tonnes in 2011 were below production due to extreme weather conditions experienced in the first half of the year. Despite this, Rio Tinto’s Pilbara ports operated at above annualised capacity rates and shipped record volumes of 61 million tonnes in the fourth quarter and 225 million tonnes for the full year.
Record global iron ore production of 65 million tonnes was achieved in the quarter (51 million tonnes attributable) and 245 million tonnes for the full year (192 million tonnes attributable).
Lower grades at Escondida and Kennecott Utah Copper impacted mined copper throughout most of 2011, driving production down 23% year on year, in line with guidance.
Full year bauxite production was 7% higher than 2010. Aluminium was 1% higher whilst alumina was one per cent lower.
The Group’s annual aluminium capacity has been slashed by 462,000 tonnes across the entire portfolio, due to the orderly shutdown of two thirds of Alma and power issues at Lynemouth and Shawinigan.
Australian hard coking coal production was 16% higher than fourth quarter of 2010 and 2% lower year on year.
Australian thermal coal was 3% lower year on year whilst semi-soft coal production slipped 7% compared with 2010.
On 19 October 2011, Rio Tinto made a recommended all-cash offer for Hathor Exploration and successfully completed the acquisition on 12 January 2012.
The lack of caution in yesterday’s statement was underlined by the revelation the company is looking to spend heavily on expansion this year.
It said that following the approval of an additional $2.7 billion capital investment to modernise the Kitimat aluminium smelter, "total capital expenditure for 2012, on approved projects and sustaining capital, is expected to be $15 billion."
Rio Tinto said that the expansion of its Pilbara mines to 283 million tonnes by the end of next year was still on track.
And there could be more to come with Rio saying that "further project approvals are likely to increase this level of investment."
That is not the mark of a company wary about the headwinds facing the global economy, or China.
The company had forecast iron ore output of 240 million tonnes for calendar 2011, but it did a little better than that forecast.
Rio Tinto also said that at the end of December, it had bought back $5.5 billion or 91 million of its plc shares under its $7 billion buy-back programme to be completed by the end of the first quarter of 2012.
