Rio Tinto raises more questions for analysts

At an analyst briefing in Perth yesterday, Rio Tinto (ASX: RIO) iron ore development chief David Joyce revised down the company’s previous guidance on the amount of exports from its huge WA Iron Ore project.

In May CEO Sam Walsh said that by 2018 Rio, Australia’s biggest iron ore exporter, would produce 360-375 million tonnes annually but Mr Joyce’s range yesterday was between 300 and 375 million tonnes. The lower end of this range would be only 10 million tonnes above the range it expects to reach next year when its US $10 billion expansion is finished.

Rio has approved the expansion of its Pilbara port and railway infrastructure, which has already cost US $6 billion but the approval to expand its mines to cater for production levels of 360 million tonnes per year is yet to be completed. Perhaps it’s Mr Walsh’s cost-cutting agenda, the uncertainty surrounding the price of iron ore or the future of Chinese growth that’s giving management an excuse to be more bearish.

According to The Australian at prices of US $100 per tonne “the revenue cost of not pursuing the extra mine expansions would be US $7 billion per year”. No doubt this is the root of Rio’s indecisiveness. Should it continue to ramp up production to counter lower prices or should it cost-cut and lower expenditure?

From reports, its looks as though Rio has decided on the latter — focusing on selling non-core assets and making its current operations more efficient. Mr Joyce reiterated this when he said the new mine capacity was “dependent on productivity gains achieved and phasing of growth mine development”. In other words, growth relies on how much it can get out of current assets before it will look at other opportunities.

In another sign of nervousness about pricing in the medium term, Rio recently signed an agreement to delay the development of its US $20 billion Simandou project in Guinea until 2018.

Foolish takeaway

Despite some experts, like the team at Fortescue (ASX: FMG), being quite bullish on the price of iron ore investors should show caution before making the commitment to purchase shares for the medium to long term. This Fool thinks the price of iron will drop (therefore share prices should drop as well) and despite the AUD being lower (offsetting losses), reductions in profit will continue in the short-to-medium term – meaning investors might get a better buying opportunity if we hold out.

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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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