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3 things you need to know about Rio Tinto Limited’s (ASX:RIO) quarterly update

The latest production update from Rio Tinto Limited (ASX: RIO) will give investors something to cheer about as the miner reported its second-best quarterly iron ore output from the Pilbara on record.

This sets the miner up for an upbeat full-year profit report next month although the share price of Rio Tinto eased 0.2% in morning trade to $79.23.

But the loss is mild given that BHP Billiton Limited (ASX: BHP) and South32 Ltd (ASX: S32) are down by more than 1% each to drag the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) down 0.1% into the red.

I doubt the weakness will last. Rio Tinto is one of my key picks for the August reporting season and there are three key takeaways from the miner’s June quarter production report.

The first is that Rio Tinto is likely to hit the top of its 2018 iron ore production range of 330 million to 340 million tonnes after iron ore production and shipment from its Western Australia operations jumped 7% and 14%, respectively.

The increase comes at a time when Chinese imports of the steelmaking ingredient are slowing but that shouldn’t be a major issue for Rio Tinto (click here to find out why).

The second is that cost pressures are increasing at some of its operations, particularly its aluminium division due to significant increases in input costs, such as diesel.

I think rising costs will continue to be a key theme for our miners and that the easy gains from cost-cutting programs are gone. This makes initiatives like Rio Tinto’s driverless trains even more important in protecting margins although the waning Australian dollar will provide some comfort to the major miners when it comes to their local operations.

The third takeaway is that the rest of Rio Tinto’s commodities are mixed. Copper and hard coking coal surged ahead but that’s because the production of these commodities was held back in the previous period.

Copper was hamstrung by a labour union strike at the Escondida mine in Chile while Cyclone Debbie forced the shutdown of its coking coal operations last year.

On the other hand, titanium dioxide production crashed 27% due to a fatality and ongoing labour disputes and aluminium production dipped 3% due largely to labour disruptions at its Canadian smelter and a power interruption at the Dunkerque smelter in France.

The next catalyst for the stock could come within weeks as Rio Tinto is finalising the sale of its stake in the Grasberg copper project in Indonesia for US$3.5 billion. The proceeds from the asset divestment program is expected to be returned to shareholders and the miner has already sold US$5 billion worth of assets in the first half of this calendar year.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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