Rio posts strong third quarter

Strong third quarter results are putting a smile on shareholder faces and proving why resources is a bullish pass-time.

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Rio Tinto's (ASX: RIO) strong third-quarter results announced yesterday rallied the stock price 2.5% higher as investors began to see the effects of increased production in both copper and iron ore.

Iron ore, which accounts for around 80% of Rio's earnings achieved record production as the company begins to feel the benefits of its Pilbara expansion. Total iron ore shipments in the quarter totalled 68 million tonnes, up 11% from the previous quarter. Rio expects iron ore production to reach 290 million tonnes per year by the end of the first half in 2014.

In November, the board will met to decide whether or not they will spend an extra $US5 billion to boost production to 360 million tonnes, surpassing Brazil's Vale (NYSE: VALE) as the biggest producer in the world. Resilience in the iron ore price and continuing demand from China are making the proposed expansion more likely.

Perhaps the most exciting highlight from the results came from the company's copper division, which posted a 23% increase year-on-year and an 11% increase from the previous quarter to 162,000 tonnes. This figure was well above estimates of around 135,000 tonnes because its Bingham Canyon mine in Utah recovered quicker than expected from landslides. Full-year production from the mine is now expected to be 185,000 tonnes, which allows the company to expect a refined copper production rate of 270,000 tonnes across all projects.

Rio's Oyu Tolgoi copper and gold project, which is a joint venture between Rio (through subsidiary Turquoise Hill Resources) and the Mongolian government, has been unable to finalise sales of around US$180 million in revenue because Chinese custom officials have not yet granted approval. Rio is hopeful the sales will be realised by the end of the year as the mine is now running at full capacity.

Coinciding with Rio's third-quarter results was the official opening of the company's US$2 billion underground Kestrel coal mine expansion. Rio energy chief Harry Kenyon-Slaney said it was a significant move for the company because most in the industry were busy selling assets, not opening them. However Mr Kenyon-Slaney also agreed that they had work to do if they were to turn around the $US52 million loss reported by the company's energy division, "We have to get costs down, and we will have to improve the productivity of these [coal] businesses and we have to do that by being aggressive on costs."

Coal prices are unlikely to recover in the near term as more countries begin to tap into natural gas resources and the Australian dollar remains high. Hard coking coal production was 2.25 million tonnes, 6% lower than a year earlier, while semi-soft and thermal coal pushed 14% higher to 7.07 million tonnes thanks to brownfield expansions and productivity gains at operations in the Hunter Valley.

A shutdown of one digestion stage at the Gove alumina facility in the Northern Territory resulted in 13% lower production of alumina whilst aluminium production was also 9% lower. "In 2013, Rio Tinto Alcan's share of bauxite, alumina and aluminium production is expected to be 43 million tonnes, 9.3 million tonnes and 3.5 million tonnes respectively," the company stated.

Foolish takeaway

Rio CEO Sam Walsh, along with competitors BHP (ASX: BHP) and Fortescue (ASX: FMG), has been forcing down costs while expanding production in a bid to counter potentially lower commodity prices and pay down debt. Mr Walsh has, so far, been successful in cutting costs and delivering on projects, especially in iron ore.

Investors who are bullish on the iron ore spot price are expecting continued strong demand from Chinese steel mills in the next five years despite a supposed 'glut' in supply. Rio, like its two biggest Australian competitors, has taken a bullish stance on Chinese demand but many investors will be eagerly awaiting the company's decision to expand production when its board meets in November. This will be a sign to investors that Rio is putting its money where its mouth is and perhaps you should too.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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