Humming

2Q23 PRODUCTION

Need To Know

• Iron ore shipment guidance now in upper half of range for FY23.
• Copper production guidance for FY23 lowered as the Kennecott smelter is rebuilt and C1 cost guidance increases to 180-200 US cents/lb.
• Compelling asset portfolio for long term, priced fairly for now, in our view.

Investment Implications

RIO’s key iron ore operations are heading for a strong year with production expected to reach the top end of the FY23 guidance range. Aluminium and copper production will not fare so well but can recover.

Copper. RIO’s diverse copper assets are experiencing different issues that have culminated in a downgrade to FY23 production guidance of 160-190mt (previously 180-210mt). The underground mine at Oyu Tolgoi (OT) began production in March this year but the commissioning of key shafts will crimp the ramp up. RIO now has 66% of this project and the production is expected to triple to 500ktpa from 2028 to 2036. OT is one of the world’s largest copper and gold deposits.

The company has decided to fully rebuild the copper smelter at Kennecott in the US with a return to full production now expected in September. RIO will invest more than US$800m at Kennecott including US$498m to expand the underground mine, US$120m to upgrade processing and US$300m on the smelter rebuild. The underground expansion will deliver about 250ktpa of additional mined copper over the next ten years alongside the open cut operations. Kennecott is the second-largest copper producer in the US.

Escondida (RIO 30%) mined copper production was down 6% compared to 2Q22 due to various operational issues but refined copper production jumped 30% due to improved ore qualities.

The average copper price was down 5% in the period to US$3.84/lb.

Aluminium. Bauxite production at Weipa was down -5% due to wet weather but aluminium production across the group was up 11% compared to 2Q22 as the Kitimat smelter ramps up. FY23 guidance for alumina has been reduced to 7.4-7.7mt due to the Queensland Alumina Refinery working on plant stability and production rate improvements.

Iron Ore. After producing 70.6mt (RIO share) in 2Q23, RIO will track towards the upper end of its FY23 production guidance range of 320-355mt. RIO noted that China’s reopening started well enough but slowed in 2Q23. Iron ore prices declined by 12% over the quarter as steel demand faltered and yet seaborne iron ore shipments to China from Australia and Brazil are at close to all-time highs. The average iron ore price achieved across the quarter of US$98.60/wmt was well below the 1H22 average of US$110.90/wmt.

Investment View

RIO has an ambition to double its annual copper output by the end of the decade through brownfield and greenfield projects. Its stakes in Escondida (30%) and Oyu Tolgoi (66%) are two of the largest copper projects in the world and it has options in others. RIO thinks the Oyu Tolgoi project could reach 500ktpa of copper production by around 2030 (with ~330kozpa gold) if everything goes to plan.

The dominant Pilbara iron ore operations are humming and although the Chinese economy is stuttering, demand for RIO’s high quality iron ore is unlikely to diminish. 

Figure 1: RIO ownership in four of the world's largest copper orebodies

Figure 2: RIO quarterly production and guidance