Rio Tinto (RIO)

Producing the goods

Rio Tinto has recently 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.

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 percent (on a 100 percent 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 percent 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-aluminium, 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 percent, alumina production jumped by 231 percent and aluminium output soared by 374 percent. On a pro-forma basis, the increases for bauxite, alumina and aluminium were 11 percent, 9 percent and 1 percent respectively.

Like iron ore, this strong production boost could not have come at a better time, given the price of aluminium has hit a record high recently as Chinese producers have agreed to cut output by as much as 10 percent 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 percent on the same period last year; whilst Australian thermal and coking coal production rose respectively by 15 percent and 25 percent 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 US$495 million, as part of the Group's overall US$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.