Rio Tinto (NYSE: RTP, Stock Forum) has announced a very encouraging June quarter production report, with quarterly output records from three of its biggest revenue earners: iron ore, copper, and alumina. Given the record price strength with respect to all three of these key commodities, the strong result could not have been better timed.  

There was also good news with respect to two of the company’s other key commodities, copper and coal, with production recovering well. We anticipate that the market will respond positively to the results, which in our view should inspire some renewed confidence in the resource sector.

The long-term upward trend in Rio remains on hold after the stock achieved a new all-time high of $558.65 in May. This represents a gain of just over 150% since the August 2007 low of $221.85. 

In the wake of such rapid gains, the upward trend of any stock would be at risk of pausing for consolidation. Rio is no exception. Despite a slip below the $450 level this month, firm support remains intact at the March low of $377. In the weeks ahead, we anticipate consolidation above this support with probes below to be limited.  

The longer-term weekly chart reveals the resilience of the broader upward trend. Once the current pause for consolidation is complete, we anticipate a continuation of the upward trend with new highs beyond $558.65 achievable in time. 

Rio Tinto released its June quarter production report on Wednesday. Ahead of the results, we were looking for strong performances from the company’s iron ore and coal businesses, which to varying degrees had disappointed over previous quarters. We were also looking for strong results from alumina-aluminum following further bedding down of the Alcan assets acquired late last year, as well as a much-improved performance from the company’s copper business.  

We are pleased to say that the company has performed well with respect to each of our criteria. Commenting on the company’s second-quarter production results, chief executive Tom Albanese said:

These strong results show that we are continuing to expand to meet rapid demand growth in the developing world.  

The integration of Alcan is proceeding to plan and the business continues to perform well. I am particularly pleased to see how swiftly our Australian coal operations recovered from the first-quarter floods. 

Chinese GDP is continuing to grow at around 10% per annum, demand is strong while supply remains constrained. Fundamentals, not financial speculation, are driving the record prices we are realizing across aluminum, copper, iron ore, and coal and we see the same trends continuing into the future. 

Let’s now examine the company’s June quarter production report with respect to its major commodities. 

Rio is the world’s second-biggest producer of iron ore and during the June quarter it achieved record quarterly iron ore production of 48 million tonnes from its Pilbara operations in Western Australia, up 14% (on a 100% basis) compared with the second quarter of 2007. The results demonstrate the benefits of Rio’s current big capacity expansion at its Pilbara iron ore operations. 

And of course the record production could not have come at a better time, given the recently negotiated 86% iron ore price increase negotiated with Asian customers for 2008 contract shipments. 

Rio’s iron ore result is particularly encouraging given that the company’s March quarter output slightly disappointed the market, due to infrastructure issues. Those issues now appear to have been fully resolved.  

The second-most important commodity group from our perspective is alumina-aluminum, and Rio’s purchase of Alcan last year continues to pay big dividends, with Rio Tinto Alcan performing well. 

Compared with the same period last year, bauxite production rose by 100%, alumina production jumped by 231%, and aluminum output soared by 374%. On a pro-forma basis, the increases for bauxite, alumina, and aluminum were 11%, 9%, and 1%, respectively. 

Like iron ore, this strong production boost could not have come at a better time, given the price of aluminum has hit a record high recently as Chinese producers have agreed to cut output by as much as 10% due to power shortages and soaring power costs. 

As we have previously highlighted, Rio is extremely well placed at the bottom of the cost-curve, as it inherited significant low-cost, hydro-electric power generating assets when it purchased Alcan.  

There was also good news with respect to two of Rio’s other most important commodities, copper and coal. The company achieved record quarterly mined copper production, up 15% on the same period last year, whilst Australian thermal and coking coal production rose respectively by 15% and 25% compared to the same period a year ago, as operations recover well from the heavy rainfall experienced during the first quarter. 

On the asset sale front, Rio has agreed the sale of its Kintyre uranium property in Western Australia for $495 million, as part of the group’s overall $15 billion divestment target. 

Rio Tinto is therefore performing very strongly and still remains modestly priced, in our view, trading on a price-earnings multiple of 13 times consensus 2008 earnings, which falls to just 11 times based on 2009 earnings estimates. 

Accordingly, Rio Tinto will remain firmly held within the Fat Prophets Portfolio. 

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Rio Tinto

Rio Tinto plc and Rio Tinto Limited operate as one business organization (Rio Tinto). Rio Tinto is an international mining company. The company's principal product and global support groups include Iron Ore, Energy, Industrial Material, Aluminium, Copper, Diamonds, Exploration, and Technology. Rio Tinto's Iron Ore group comprises iron ore operations in Australia, Canada, and Brazil and development projects in Guinea (West Africa) and India. The Rio Tinto Energy group comprises uranium, thermal coal, and coking coal operations. Rio Tinto's Industrial Minerals group produces borates, talc, industrial salt, and titanium dioxide feedstock. Rio Tinto Aluminium is an integrated product group with operations in Australia, New Zealand, and the United Kingdom. Rio Tinto's Copper group comprises Kennecott Utah Copper in the United States and interests in the copper mines of Escondida, Grasberg, Northparkes, Palabora Mining Company (Palabora), and the Resolution Copper project. 

Market capitalization                 $100.8 billion