Rio Tinto plc (LON:RIO) has released its second quarter production results.
Rio Tinto Chief Executive J-S Jacques said “We delivered a strong performance, particularly in iron ore and bauxite, demonstrating the underlying resilience of our business and ability to adapt in difficult conditions. Our iron ore assets are performing well in a strong pricing environment and we are on track to meet our 2020 iron ore guidance. Despite various COVID-19 related challenges, all our assets have continued to operate, with our first priority to protect the health and safety of all our employees and communities.
“Our focus is to maintain a business as usual approach with many safeguards at a very unusual time. Our operational teams are continuing to run our assets safely so we can continue to contribute to local and national economies and serve our customers. We remain even more committed to our relationship with communities, following the Juukan Gorge events in the Pilbara, and we are engaging extensively with Traditional Owners around our operations and across Australia.
“We are executing our value over volume strategy to drive performance, productivity and free cash flow per share. We will remain agile and ready to adapt to the changing operating and macro environment.”
Q2 Operational update
• We continue to prioritise the health and safety of our employees and communities during this turbulent period. We achieved an all injury frequency rate of 0.37 for the first half of 2020, trending positively compared with a rate of 0.42 in 2019. We have now fully embedded our rigorous COVID-19 health and hygiene controls as we adapt to the new operating conditions. Our operational sites and offices are moving ahead with the implementation of fit for purpose COVID-19 screening as an additional measure to protect our people and communities.
• We remain even more committed to our relationship with communities, following the Juukan Gorge events in the Pilbara. We are engaging extensively with Traditional Owners, including the Puutu Kunti Kurrama and Pinikura people, and indigenous leaders in the Pilbara and across Australia. On 19 June 2020, we announced a board-led review of our heritage management processes within Iron Ore to be completed by October 2020. We will also contribute to the Inquiry by the Joint Standing Committee on Northern Australia that will report to the Senate and we will continue to support the West Australian government’s planned reform of the Aboriginal Heritage Act 1972 (WA).
• Overall, we achieved a robust production performance with volumes up 1% compared with the second quarter of 2019 on a copper equivalent basis despite significant global challenges, restrictions related to COVID-19 and the impact of the earthquake at Kennecott, Utah.
• Pilbara iron ore shipments of 86.7 million tonnes (100% basis) were 1% higher than the second quarter of 2019 despite the impact of COVID-19 related operational controls. With 1.7 million tonnes of port sales in the second quarter, we continue to grow our portside business steadily, looking to better serve our existing customers and open opportunities to sell to new customers who do not participate in the seaborne market.
• Bauxite production of 14.6 million tonnes, 9% higher than the second quarter of 2019, continued the first quarter trend following the successful ramp-up of Amrun in 2019, and higher production at the non-managed CBG joint venture in Guinea reflecting good progress on the ramp-up of the expansion.
• Aluminium production of 0.8 million tonnes in the second quarter was 2% lower than the second quarter of 2019 primarily due to pot relining at Kitimat, the decision to operate the ISAL smelter at 85% capacity and the curtailment of the fourth pot line at our New Zealand Aluminium Smelter (NZAS) in April 2020 due to COVID-19 impacts.
• On 9 July 2020, we announced the wind-down of operations and eventual closure of NZAS following the conclusion of the strategic review.
• Second quarter mined copper was 3% lower than the same period of 2019 due to lower head grade at Kennecott. Second quarter refined copper was 67% lower than the same period of 2019 due to the impact from the 5.7 magnitude earthquake in the first quarter resulting in an unplanned flash converting furnace rebuild at Kennecott, in addition to the planned 45-day smelter shutdown in May/June.
• On 29 June 2020, we announced an agreement with Turquoise Hill Resources and the Government of Mongolia on the preferred domestic power solution for Oyu Tolgoi that paves the way for the Government to fund and construct a State Owned Power Plant at Tavan Tolgoi. Parties will work towards finalising a Power Purchase Agreement by March 2021.
• The new Oyu Tolgoi mine design announced on 3 July 2020, confirms that the caving method of mining remains valid. We are targeting first sustainable production between October 2022 to June 2023 and development capital of $6.6 to $7.1 billion based on the updated mine design of Panel 0. Material contained in pillars retained on either side of Panel 0 have been reclassified from Ore Reserves to Mineral Resources. Part of the material contained in these pillars is expected to be recoverable at a later stage following additional studies which are currently underway.
• Titanium dioxide slag production of 262 thousand tonnes was 13% lower than the second quarter of 2019 partly due to COVID-19 restrictions in Quebec and South Africa.
• Production of pellets and concentrate at the Iron Ore Company of Canada (IOC) was 9% higher than the same period of 2019 with continued focus on concentrate feed to match market demand.
• Governments are gradually lifting restrictions on the movement of goods and people as part of their COVID-19 recovery plans. However, some restrictions remain in place or are being reintroduced. As a result, there continues to be an impact on projects in general although to a lesser degree than earlier in the year.
• Capital expenditure is expected to be around $6 billion in 2020 (previously $5 to $6 billion) due to an appreciation in our major operating currencies against the US dollar since the first quarter and a reduced impact of COVID-19 on both sustaining and development expenditure. Capital expenditure for 2021 and 2022 is expected to be around $7 billion per year (previously $6.5 billion). This includes spend from 2020 that has been re-phased as a result of COVID-19 restrictions. Further details can be found in the Investments, growth and development projects section below.
• We made a final payment of US$1.0 billion in Australian income tax in June 2020 with respect to 2019 profits.
|Rio Tinto share, unless otherwise stated||2019 Actuals||H1 2020 (YTD)||2020|
|Pilbara iron ore (shipments, 100% basis) (Mt)||327||159.6||324 to 334|
|Bauxite (Mt)||55||28.4||55 to 58|
|Alumina (Mt)||7.7||4.0||7.8 to 8.2|
|Aluminium (Mt)||3.2||1.6||3.1 to 3.3|
|Mined copper (kt)||577||265.7||475 to 520|
|Refined copper (kt)||260||74.1||165 to 205|
|Diamonds (M carats)||17||7.7||12 to 14|
|Titanium dioxide slag (Mt)||1.2||0.6||Lower end of 1.2 to 1.4|
|IOC iron ore pellets and concentrate (Mt)||10.5||5.3||10.5 to 12.0|
|Boric oxide equivalent (Mt)||0.5||0.26||~0.5|
• Production guidance remains unchanged across all commodities from the First Quarter Operations Review.
• We will continue to monitor and adjust production levels and product mix to meet customer requirements in 2020, in line with our value over volume strategy, government imposed restrictions related to COVID-19, and any other potential COVID-19 related disruptions.
• Pilbara iron ore 2020 unit cost guidance is expected to be within the previous guidance of $14 to $15 per tonne, including unplanned one-off COVID-19 costs of $0.50 per tonne mostly incurred in the first half of 2020, relating to controls such as cleaning, screening, additional flights, and roster changes. The guidance is based on an Australian dollar exchange rate of $0.67.
• Copper C1 unit cost guidance in 2020 remains unchanged at 120-135 US cents/lb.
Investments, growth and development projects
• Governments are gradually lifting restrictions on the movement of goods and people as part of their COVID-19 recovery plans. Nevertheless, the pace is controlled and some restrictions remain in place or are being reintroduced. This continues to have an impact on projects in general although to a lesser degree than earlier in the year.
• Capital expenditure is expected to be around $6 billion in 2020 (previously $5 to $6 billion) due to an appreciation in our major operating currencies against the US dollar since the first quarter and a reduced impact of COVID-19 on both sustaining and development expenditure. Our focus is to complete as much of the original planned sustaining expenditure as possible in the second half to enhance the resilience of our asset base. Capital expenditure for 2021 and 2022 is expected to be around $7 billion per year (previously $6.5 billion). This includes spend from 2020 that has been re-phased as a result of COVID-19 restrictions.
• Exploration and evaluation spend in the second quarter was $136 million ($280 million in the first half of 2020), 16% lower than the second quarter of 2019, and 5% lower than the first quarter of 2020.
Pilbara replacement projects
• Project teams continue to actively manage the impacts of COVID-19 with the implementation of project response plans. Recovery efforts are underway including a transition back to the usual three weeks on, one week off project rosters in the Pilbara.
• Supply chain issues are being managed and construction continues to progress despite necessary roster changes, social distancing and travel restrictions.
• The Koodaideri project is progressing with production ramp-up still expected to occur in early 2022. The primary crusher surge bin was delivered to site in May 2020, representing the first significant structural component for the processing plant.
• First ore from the Robe River Joint Venture sustaining production projects (West Angelas C&D and Mesa B, C and H at Robe Valley) is still expected in 2021. All primary approvals for Mesa H have now been received.
Oyu Tolgoi underground project
• Work continues to progress despite international travel restrictions issued by the Government of Mongolia to manage the risk of COVID-19 transmission.
• Underground lateral development continues to achieve high productivity with average monthly rates above 1,800 equivalent metres (eqm) in April, May and June.
• Shafts 3 and 4 remain on care and maintenance with no effective progress for the quarter and non-critical surface construction work areas have now also been placed on care and maintenance. Limited night shift work has recommenced on critical underground handling infrastructure, with the material handling system currently progressing at approximately 40% of planned rates.
• The new mine design announced on 3 July 2020, confirms that the caving method of mining remains valid and that the underground schedule and costs currently remain within the ranges previously disclosed. We are targeting first sustainable production between October 2022 to June 2023 and development capital of $6.6 to $7.1 billion based on the updated mine design of Panel 0.1
• Material contained in pillars retained on either side of Panel 0 have been reclassified from Ore Reserves to Mineral Resources. Part of the material contained in these pillars is expected to be recoverable at a later stage following additional studies which are currently underway.
• The definitive estimate of cost and schedule for Panel 0 is still expected in the second half of 2020.
Other key projects and exploration and evaluation
• Phase one of the south wall pushback project at Kennecott remains on track, despite disruptions from the 5.7 magnitude earthquake in the first quarter, with access to higher grades expected from 2021.
• The Zulti South project in South Africa remains on full suspension due to security and community issues.
• The Kemano hydropower tunnel project is targeting a re-start of tunnel excavation works in the third quarter of 2020.
• We are continuing our study programme at the Resolution Copper project in Arizona, USA despite COVID-19 disruptions. The study commenced underground characterisation of the ore body following Board approval in April 2020. Sinking of Shaft 9 continues on schedule and on budget, reaching a depth of 1,906m out of 2,086m total at the end of June.
• At our Winu project in Western Australia, drilling and fieldwork activities continue with strong health protocols in place to prevent the transmission of COVID-19. Restrictions are beginning to ease, allowing people movements and access to sites. We continue to see potential to develop the Paterson into a broader opportunity through both our own exploration and joint ventures in the region.
• The Simandou iron ore project (Blocks 3 and 4) in Guinea is progressing as we collaborate with our partners to optimise the programme. A scope of work has been prepared to enable selected China-based design institutes to update the infrastructure elements of the project including the design of its designated trans-Guinean rail line and to assess shipping methods.
The level of accuracy of these estimates is preliminary in nature and subject to a range of variables, in line with previous guidance. The confidence level of these estimates is at a level associated with a Pre-Feasibility Study, and further work is required between now and the second half of 2020 to refine the mine design options and study them to a level of confidence and accuracy associated with Feasibility Study quality estimates.
All figures in this report are unaudited. All currency figures in this report are US dollars, and comments refer to Rio Tinto’s share of production, unless otherwise stated. To allow production numbers to be compared on a like-for-like basis, production from asset divestments completed in 2019 is excluded from Rio Tinto share of production data.
1 SP10 includes other lower grade products. 2 Shipments includes material shipped from the Pilbara to our portside trading facility in China which may not be sold onwards in the same period. 3 While Rio Tinto has a 53% net beneficial interest in Robe River Iron Associates, it recognises 65% of the assets, liabilities, sales revenues and expenses in its accounts (as 30% is held through a 60% owned subsidiary and 35% is held through a 100% owned subsidiary). The consolidated basis sales reported here include Robe River Iron Associates on a 65% basis to enable comparison with revenue reported in the financial statements.
Pilbara operations produced 161.1 million tonnes (Rio Tinto share 133.2 million tonnes) in the first half of 2020, 3% higher than the same period of 2019. Total material moved across our operations, including waste, was 8% higher than the corresponding period of 2019.
First half shipments of 159.6 million tonnes (Rio Tinto share 132.0 million tonnes) were 3% higher than the first half of 2019, despite infrastructure damage and significant disruptions experienced at our ports as a result of Tropical Cyclone Damien in February. In the second quarter, our operations performed well, despite the strict measures implemented to manage COVID-19. In early June, our port operations achieved a record week of shipping with rates exceeding 400 million tonnes per annum.
Approximately 14% of shipments in the first half of 2020 were priced by reference to the prior quarter’s average index lagged by one month. The remainder was sold either on current quarter average, current month average or on the spot market.
Approximately 31% of first half 2020 sales were made on a free on board (FOB) basis, with the remainder sold including freight.
Achieved average pricing in the first half of 2020 was $78.5 per wet metric tonne on an FOB basis (equivalent to $85.4 per dry metric tonne, at 8% moisture assumption). This compares to the average first half price for the Platts 62% index of $85.1 per dry metric tonne.
China Portside Trading
We continue to increase the volumes of our port sales in China, with 2.5 million tonnes of sales during the first half of 2020 (1.7 million tonnes in the second quarter), and included product from our IOC and Pilbara operations, as well as third party volume. Our portside trading sales are now serving 61 new customers.
Following the Juukan Gorge heritage events in the Pilbara, we announced a board-led review of our heritage management processes within Iron Ore to be completed by October 2020. We will also contribute to the Inquiry by the Joint Standing Committee on Northern Australia that will report to the Senate and we will continue to support the West Australian government’s planned reform of the Aboriginal Heritage Act 1972 (WA). We have introduced additional controls related to heritage management and we are actively engaging with Traditional Owners and Aboriginal and Torres Strait Islander communities around our operations and across Australia more broadly.
Second quarter bauxite production of 14.6 million tonnes was 9% higher than the second quarter of 2019. Production at managed operations increased by 9% underpinned by the Amrun mine, whilst production at the non-managed CBG joint venture in Guinea increased by 7% reflecting good progress on the ramp-up of the expansion.
We shipped 10.7 million tonnes of bauxite to third parties in the second quarter, 13% higher than same period of 2019.
Our Bauxite Integrated Operations Centre (BIOC) in Brisbane, Australia provides 24/7 operation and monitoring of all safety, production and quality aspects at our remote bauxite sites in Weipa, Queensland and Gove, Northern Territory. We continue to apply technology solutions for optimising the supply chain, leveraging data analytics and progressing automation initiatives. For instance, we are utilising a fully automated “drone in a box” for remote monitoring of stock piles, removing the need for manual visual inspection.
Alumina production in the second quarter of 2020 is 6% higher than the same period of 2019 due to higher production levels in the Pacific refineries with Yarwun delivering a half year production record.
Aluminium production in the second quarter of 0.8 million tonnes was 2% lower than the second quarter of 2019 (flat on the prior quarter), primarily due to pot relining at Kitimat, the decision to operate the ISAL smelter in Iceland at 85% of its capacity, and the curtailment of the fourth pot line at NZAS on 3 April 2020 due to COVID-19 impacts. This has been partly offset by the non-managed Becancour smelter which has reached 93% capacity, following its ramp-up after a lock-out in 2019.
Average realised aluminium prices including premiums for value-added products (VAP) were down by 15% to $1,849 per tonne in the first half of 2020 (first half 2019: $2,174 per tonne). The LME price decreased by 13% to $1,595 per tonne (first half 2019: $1,826), whilst the mid-west premium duty paid dropped 41% to $249 per tonne in the first half of 2020 (first half 2019: $420 per tonne) due to the impact of COVID-19. Our VAP sales also dropped significantly to 40% of primary metal sold in the first half of 2020 (first half 2019: 54%) in line with the market, but this was substituted by sales of standard ingot products (P1020). Product premiums for VAP sales declined by 14% averaging, $208 per tonne of VAP sold (first half 2019: $242 per tonne).
The aluminium industry continues to face challenging conditions in global markets and policy uncertainty, exacerbated by the impact of COVID-19. On 9 July 2020, we announced the wind-down of operations and eventual closure of the Tiwai Point Aluminium Smelter (NZAS) following the conclusion of the strategic review which has shown the business is no longer viable given high energy costs and a challenging outlook for the aluminium industry. As a result, NZAS has given Meridian Energy notice to terminate the power contract, which will end in August 2021 when the smelter’s wind-down of operations is expected to be complete.
We continue to actively work on enhancing the competitiveness of our smelters, including discussing energy pricing with stakeholders, to ensure the sustainability of our smelters in Australia and Iceland. Work on the strategic review of the ISAL smelter in Iceland announced in February 2020 is ongoing, to determine the viability and competitive position of the operation considering all options including closure.
Mined copper production was 11% lower than the same quarter of 2019, primarily due to pit sequencing and lower copper grades, with the end of the east wall lower pit mining approaching. Copper grades were 11% lower in the second quarter of 2020 compared with the same quarter of 2019. Grades will continue to be lower through 2020 before increasing from the first half of 2021, with the transition from east wall to south wall mining.
Refined copper was 89% lower than the same quarter in 2019, driven by the shutdown of the flash converting furnace required as a result of the earthquake on 18 March, and the consequent shutdown of anode production. Low levels of refined copper produced in the second quarter were based on anodes refined prior to the shutdown and refining of scrap anodes.
The planned 45-day smelter shutdown in May has concluded and we are now focused on the safe re-start of the smelter. The flash converting furnace rebuild required following the earthquake in Utah on 18 March is on track for completion by the second half of July.
Escondida operated with a reduced workforce to incorporate preventative measures in response to COVID-19 in the second quarter. Despite this, mined copper production was 2% higher than the same quarter of 2019 due to record concentrator throughput, which was offset by 6% lower grade and 3% lower amount of material stacked into the leaching pads.
Mined copper production from the open pit was 7% lower than the same quarter of 2019 primarily due to a scheduled maintenance shutdown in the mill. Sales recovered in the second quarter with the easing of COVID-19 trucking restrictions within China and improved border access. Mine development and production phasing have been successfully accelerated so that access to higher copper and gold grades are now expected in the second half of 2020 instead of the originally planned first half of 2021.
At 30 June 2020, the Group had an estimated 230 million pounds of copper sales that were provisionally priced at 255 cents per pound. The final price of these sales will be determined during the second half of 2020. This compares with 220 million pounds of open shipments at 31 December 2019, provisionally priced at 277 cents per pound.
At Argyle, carat production was 1% lower than the same period of 2019 as a result of an 11% reduction in recovered grade, partially offset by higher tonnes mined and processed. Preparation continues for the safe cessation of Argyle operations before the end of 2020 and closure activities commencing in 2021.
At Diavik, carats recovered in second quarter 2020 were 19% lower than the second quarter of 2019 due to lower processed tonnes and lower grade in the underground.
Rio Tinto continues to execute our value over volume strategy to match market demand during a challenging period for the industry.