Could there be a silver lining to Rio Tinto Limited's (ASX: RIO) weaker-than-expected quarterly production result?
The iron ore giant blamed bad weather for lowering its production guidance to 340 million tonnes of ore from 350 million tonnes for 2015.
The miner's second quarter output of the steel making commodity also came in below estimates. Rio Tinto produced 79.7 million tonnes of ore in the three months to June, which is 9% above the same time last year but was below the median consensus forecast of 81.9 million tonnes.
While shares in Rio Tinto slipped 0.7% into the red, investors were clearly excited in early trade and bidded the stock up 1.6% to $54 as they came to the view that a slowdown in production growth could actually be a good thing as it might keep the price of iron ore above $US50 a tonne.
Some analysts believe dividend payments from Rio Tinto and BHP Billiton Limited (ASX: BHP) will be under threat if iron ore falls below that level. Coincidentally, the iron ore price advanced 1% to $US50.55 a tonne in overnight trade.
I am not suggesting that this is a deliberate strategy of Rio Tinto but modest production misses from the majors could be a blessing in disguise.
Certainly, second-tier producers like Fortescue Metals Group Limited (ASX: FMG) must be rubbing their hands in glee as they have long argued that their bigger rivals needed to take their foot off the gas in terms of increasing supply of the commodity in the face of slowing Chinese demand.
Rio Tinto's production shortfall comes hot on the heels of Brazilian iron ore giant Vale's decision to cut 25 million tonnes of the commodity from the global market in response to the halving of the iron ore price over the past 12 months.
The collapse in the commodity has prompted miners to slash spending on exploration and Rio Tinto is no exception with its exploration spend falling close to 30% to $243 million in the first half of the financial year, compared to the same time last year.
Rio Tinto's quarterly output of other commodities like copper and aluminium was largely in-line with market expectations.
Analysts are probably going to make downgrades in their earnings forecasts for Rio Tinto but I expect that to be mild.
Rio Tinto represents good value for those with a two-year investment horizon and who can stomach the short-term volatility as I am anticipating Rio Tinto to be in a far more dominant market position after the dust from the iron ore shake-up settles.
