Rio Tinto delivered consistent operational performance

Rio Tinto (LON:RIO,released third quarter production results.

Rio Tinto chief executive J-S Jacques said “We have delivered consistent operational performance in the third quarter, highlighted by strong production from the Group’s copper assets. We made strong strategic progress with the full exit from coal, the announcement of the additional $3.2 billion of share buy-backs, and the signing of a binding conditional agreement to exit Grasberg for $3.5 billion. We continue to pursue all opportunities to improve productivity and drive enhanced cash flow generation. This, combined with the disciplined allocation of capital, will ensure we continue to deliver superior returns to our shareholders in the short, medium and long-term.”

Key points

•On 15 August 2018, a truck operator was fatally injured at the Paraburdoo Iron Ore mine. An investigation is in progress.

•On 9 July 2018, a serious incident occurred at Richards Bay Minerals (RBM) mining operation, resulting in the fatality of a security contractor. The incident remains the subject of a police investigation.

•Pilbara iron ore shipments of 81.9 million tonnes (100 per cent basis) in the third quarter were five per cent lower than the third quarter of 2017, due to planned maintenance cycles and safety pauses across all operations following the fatality.

•Bauxite production of 12.7 million tonnes was one per cent lower than the corresponding quarter of 2017, with strong production at Weipa offset by lower production at the non-managed Sangaredi and Porto Trombetas (MRN) mines. Third party shipments increased by two per cent to 8.4 million tonnes, reflecting firm demand.

•Aluminium production of 0.9 million tonnes was one per cent lower than the third quarter of 2017 due primarily to ongoing labour disruptions at the non-managed Becancour smelter in Canada. Full year guidance has been revised to between 3.4 and 3.5 million tonnes (previously 3.5 to 3.7 million tonnes).

•Mined copper production of 159.7 thousand tonnes was 32 per cent higher than the corresponding quarter of 2017, primarily reflecting increased production from Rio Tinto Kennecott due to higher grades.

•Titanium dioxide slag production was nine per cent lower than the third quarter of 2017, but 28 per cent higher than the previous quarter as production at Rio Tinto Fer et Titane and RBM ramped up following disruptions in the second quarter.

•Production at Iron Ore Company of Canada was nine per cent lower than the third quarter of 2017, however significantly higher than the previous quarter as operations ramped up to normal production rates following a labour dispute in the previous quarter.

•The major growth projects continue to progress. First bauxite shipment from Amrun is now expected in the fourth quarter of 2018 with full ramp-up in 2019. Following an annual re-forecast of the Oyu Tolgoi underground development schedule and costs, capital costs remain in line with the overall $5.3 billion budget and construction of the first draw bell is still expected in mid-2020. The preliminary re-forecast assessment indicates ground conditions and shaft sinking challenges that are ultimately expected to result in a revised ramp-up schedule to sustainable first production.

•On 1 August 2018, Rio Tinto completed the sale of its remaining coal assets for $3.95 billion. This, along with the sale of the Winchester South development project in the first half of 2018, resulted in gross disposal proceeds of $4.15 billion.

•On 20 September 2018, Rio Tinto subsequently announced the return to shareholders of the $3.2 billion post-tax coal disposal proceeds via an off-market buy-back tender in Rio Tinto Limited shares totalling $1.9 billion, and further on-market purchases of Rio Tinto plc shares of approximately $1.3 billion.

•On 28 September 2018, Rio Tinto announced that it had signed a binding agreement to sell its entire interest in the Grasberg mine in Indonesia to PT Indonesia Asahan Aluminium (Persero) (Inalum), Indonesia’s state mining company, for $3.5 billion. The transaction is subject to a number of conditions precedent being satisfied, including the receipt of regulatory approvals, with completion expected in the first half of 2019.

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 2017 is excluded from Rio Tinto share of production data but assets sold in 2018 remain in comparisons.

Rio Tinto share of production (million tonnes)

Pilbara operations

On 15 August 2018, a truck operator was fatally injured at the Paraburdoo Iron Ore mine. An investigation is in progress.

Pilbara operations produced 251.2 million tonnes (Rio Tinto share 209.7 million tonnes) in the first nine months of 2018, four per cent higher than the same period of 2017 due to favourable weather conditions in the first half, a continued improvement in mine and rail capacity as Silvergrass ramps up and ongoing productivity improvements across the integrated system.

Third quarter production of 82.5 million tonnes (Rio Tinto share 69.1 million tonnes) was three per cent lower than the third quarter of 2017, due to planned maintenance cycles and safety pauses across all operations following the fatality at Paraburdoo operations.

Year to date sales of 250.7 million tonnes (Rio Tinto share 208.1 million tonnes) were four per cent higher than the corresponding period of 2017, with third quarter sales of 81.9 million tonnes (Rio Tinto share 68.0 million tonnes) five per cent lower than the same period of last year.

Approximately 17 per cent of sales in the quarter 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 33 per cent of sales in the quarter were made free on board (FOB), with the remainder sold including freight.

Pilbara projects

The automation of the Pilbara train system (AutoHaulTM) is in ramp-up, with a steady increase in the number of trains in autonomous mode over the third quarter. Autonomous mode operations have increased to an average of 34 trains per day, equating to 290,000 kilometres (or 45 per cent of daily kilometres) completed in this mode. Full implementation of AutoHaulTM is expected by the end of 2018.

The Koodaideri feasibility study remains on track for completion in 2018. Early works funding of $146 million was approved on 1 August 2018 ahead of a final investment decision expected by the end of the year.

The approval of the West Angelas Deposits C and D project, and the Robe Valley sustaining project was announced by Rio Tinto and its joint venture partners on 1 October 2018 for $1.55 billion (Rio Tinto’s 53 per cent share $820 million). Construction is forecast to commence in 2019, subject to final environmental and government approvals.

2018 guidance

Rio Tinto’s Pilbara shipments in 2018 are expected to be at the upper end of the existing guidance range (330 to 340 million tonnes, 100 per cent basis).

ALUMINIUM

Rio Tinto share of production (‘000 tonnes)

Bauxite

Bauxite production of 12.7 million tonnes was one per cent lower than the third quarter of 2017, with strong production at Weipa offset by lower production at the non-managed Sangaredi and Porto Trombetas (MRN) mines. Production at Sangaredi was 24 per cent lower than the third quarter of 2017 due to tie-in works required to complete expansion works, whilst production was partly curtailed at MRN as a result of the declaration of force majeure at Norsk Hydro’s Alunorte alumina refinery.

8.4 million tonnes of bauxite were shipped to third parties in the third quarter of 2018, two per cent higher than the third quarter of 2017, reflecting firm demand.

Amrun

The Amrun project is ahead of schedule, with first shipment now expected in the fourth quarter of 2018 and full ramp-up in 2019. Pre-commissioning has commenced on critical infrastructure such as the reclaimer and beneficiation plant, and the shiploader was successfully transported to site and installed on the wharf facility.

Alumina

Alumina production for the quarter was one per cent lower than the corresponding period in 2017.

Aluminium

Quarterly aluminium production was one per cent lower than the corresponding period of 2017, due to an ongoing lock-out at the non-managed Becancour smelter, which began on 11 January 2018. Excluding this impact, aluminium production for the third quarter was two per cent higher than the same period of 2017, reflecting continued productivity creep.

On 14 September 2018, Rio Tinto was informed by Hydro that it had withdrawn its offer to acquire the ISAL smelter in Iceland, its 53.3 per cent share in the Aluchemie anode plant in the Netherlands and its 50 per cent share in the Aluminium fluoride plant in Sweden. The sale of the Aluminium Dunkerque smelter in France for $500 million is expected to complete in the fourth quarter of 2018, subject to satisfactory completion of consultations with key stakeholders and applicable regulatory clearances.

Market disruptions

Although Rio Tinto is broadly balanced in alumina, it is exposed to long-term legacy alumina sales contracts, which are LME linked. The negative impact on EBITDA of these legacy contracts, due to the significant escalation in the alumina index price as a result of industry supply disruptions, was $178 million in the first half of 2018 and a further $130 million in the third quarter.

The wind-down period for sanctions implemented by the United States Treasury Department on various Russian individuals and companies has been extended until 12 November 2018. Rio Tinto continues to monitor this situation closely and no force majeure declarations have been made to date.

2018 guidance

As announced on 11 October 2018, raw material cost headwinds (caustic soda, petroleum coke, green coke and tar pitch) are expected to have a $400 million negative impact on EBITDA in full year 2018 compared with 2017. In addition, higher thermal coal prices are expected to have a $100 million negative impact in 2018 for the Pacific Aluminium smelters.

Rio Tinto’s expected share of bauxite production in 2018 has been revised to the upper end of the previous guidance range at between 50 and 51 million tonnes (previously 49 to 51 million tonnes).

Aluminium guidance is revised to between 3.4 and 3.5 million tonnes (previously 3.5 to 3.7 million tonnes), to reflect the impact of the ongoing lock-out at the non-managed Becancour smelter. This excludes any potential adjustment from the completion of the sale of the Aluminium Dunkerque smelter.

Alumina production guidance remains unchanged at 8.0 to 8.2 million tonnes.

COPPER & DIAMONDS

Rio Tinto share of production (‘000 tonnes)

Rio Tinto Kennecott

Mined copper production in the third quarter of 2018 was significantly higher than the third quarter of 2017 as mining activity continued in a higher grade area of the pit, coupled with productivity improvements and increased plant throughput. The production profile is expected to experience increased variation in grade as operations mine in lower levels of the pit, together with waste stripping related to the south wall pushback expansion. Anticipated south wall pushback grade increases beginning in late 2020 are expected to offset this impact over the longer term.

Refined copper was one per cent higher than the corresponding period of 2017, and 33 per cent above the second quarter of 2018 as better mine grades improved concentrate quality and smelting throughput.

Rio Tinto Kennecott continues to toll and purchase third party concentrate to optimise smelter utilisation, with 6.3 thousand tonnes of concentrate received for processing in the third quarter of 2018. Purchased and tolled copper concentrate are excluded from reported production figures.

The pushback of the south wall progressed during the quarter. It will extend the life of mine and remains on track for completion in 2020.

Escondida

Third quarter mined copper production at Escondida was six per cent higher than the same period of 2017, reflecting the ramp-up of Escondida production to nameplate capacity following commissioning of the Los Colorados concentrator, which occurred in the second half of 2017.

Oyu Tolgoi

Mined copper production from the open pit in the third quarter of 2018 was seven per cent higher than the corresponding period of 2017, with higher grades partly offset by lower plant throughput due to the processing of harder ore.

Oyu Tolgoi Underground Project

The project workforce reached 8,800 at the end of September, with an 89 per cent participation rate of Mongolian nationals. A ground breaking ceremony was held at site to mark the commencement of shaft three and shaft four earthworks. Work continues on shaft two equipping and on the conveyor to surface decline.

Following an annual re-forecast of the underground development schedule and costs, capital costs remain in line with the overall $5.3 billion budget and construction of the first draw bell is still expected in mid-2020. The preliminary re-forecast assessment indicates ground conditions and shaft sinking challenges that are ultimately expected to result in a revised ramp-up schedule to sustainable first production.

In February 2018, the Southern Region Power Sector Co-operation Agreement under which Oyu Tolgoi was committed to working with the Government of Mongolia on a Tavan Tolgoi Independent Power Provider project was cancelled. As a result the Government of Mongolia expects Oyu Tolgoi to deliver a domestic power source for the operation within four years (by February 2022).

Oyu Tolgoi is progressing studies and preparations for suitable power solutions and continues to discuss the provision of domestic power with the Government of Mongolia.

On 15 October 2018, a loader caught fire while operating in the Oyu Tolgoi underground mine. All employees working underground at the time were evacuated safely.

Grasberg

On 28 September 2018, Rio Tinto signed a binding agreement to sell its entire interest in the Grasberg mine in Indonesia to PT Indonesia Asahan Aluminium (Persero) (Inalum), Indonesia’s state mining company, for $3.5 billion. Separately, Inalum signed a binding agreement with Freeport-McMoRan Inc. (FCX) in relation to the future ownership and operation of the Grasberg mine.

The transaction and the Inalum/FCX transaction (which are inter-conditional) are each subject to a number of conditions precedent being satisfied, including the receipt of regulatory approvals. Subject to these conditions being met, completion of both transactions is expected to occur in the first half of 2019.

The proceeds of the sale are to be paid in cash to Rio Tinto at closing, with the funds to be used for general corporate purposes.

Rio Tinto is reporting its metal share for the third quarter as zero.

Diamonds

At Argyle, carat production was 19 per cent lower than the third quarter of 2017, when production was enhanced by the processing of higher grade alluvial tailings.

At Diavik, carats recovered in the third quarter of 2018 were nine per cent lower than the corresponding period in 2017 due to lower grades. The A21 project successfully mined first ore in March 2018 and is expected to reach commercial production during the fourth quarter of 2018. This fourth diamond pipe was officially opened on 20 August 2018.

2018 guidance

Rio Tinto’s expected share of mined copper production for 2018 is expected to be at the upper end of the previously published range of between 510 and 610 thousand tonnes. Refined copper production is expected to be between 225 to 265 thousand tonnes.

Diamond production guidance for 2018 is between 17 and 20 million carats.

ENERGY & MINERALS

(a) Production from Coal & Allied of 9.9 million tonnes (Rio Tinto share) prior to divestment on 1 September 2017 has been excluded from the comparisons above.

Coal

Production of coal attributable to Rio Tinto ceased following the completion of the sale of Rio Tinto’s interests in Kestrel and Hail Creek on 1 August 2018. The sale of these assets, along with the Valeria coal and Winchester South development projects resulted in gross disposal proceeds of $4.15 billion.

Iron Ore Company of Canada (IOC)

Following a labour dispute in the second quarter of 2018, IOC achieved a safe and successful re-start and ramp-up of operations to normal production rates by the end of June 2018. Third quarter pellet production was 3.0 million tonnes (Rio Tinto share 1.7 million tonnes) and concentrate production for sale was 1.9 million tonnes (Rio Tinto share 1.1 million tonnes). Total third quarter production was nine per cent lower than the corresponding quarter in 2017, due to maintenance and the commissioning of a productivity improvement project on the spiral plant, which temporarily restricted throughput.

Resulting sales achieved for the quarter were 5.4 million tonnes (Rio Tinto share 3.2 million tonnes) of concentrate and pellets.

Borates

Borates production was comparable to the previous quarter and the third quarter of 2017, with production aligned to customer demand.

Iron and Titanium (RTIT)

Titanium dioxide slag production for the quarter was nine per cent lower compared to the third quarter of 2017.

During the quarter, slag production at Richards Bay Minerals (RBM) continued to be impacted by ongoing labour disputes between contractors and their employees. On 9 July 2018, a serious incident occurred at RBM’s mining operation, resulting in the fatality of a security contractor. The incident remains the subject of a police investigation. With Rio Tinto’s highest priority being the safety of its people, operations at RBM were temporarily suspended, and a safe, optimised re-start was achieved. The force majeure on deliveries from RBM has now been lifted.

Following a deflagration of a furnace at Rio Tinto Fer et Titane Sorel-Tracy (RTFT) on 23 July 2018, three of nine furnaces at RTFT are idle, two of which are being rebuilt. One of four furnaces at RBM remains idle. The focus remains on maximising the productivity of the furnaces currently in operation, and a decision to re-start idle furnaces will be based on maximising value over volume.

Salt

Salt production in the third quarter of 2018 was 21 per cent higher than the same quarter of 2017 to align to demand.

Uranium

Energy Resources of Australia continues to process existing low grade stockpiles. Third quarter production was 15 per cent lower than the same period of 2017 due to declining grades and completion of laterite processing.

Production at Rössing in the third quarter of 2018 was 31 per cent higher than the corresponding quarter of 2017 due to higher mill grades.

2018 guidance

Coal production for 2018 is 4.0 million tonnes of hard coking coal and 2.5 million tonnes of thermal coal, reflecting the completion of the asset disposals.

At IOC, guidance for 2018 production remains at 9.0 to 10.0 million tonnes of iron ore pellets and concentrates.

Guidance for Rio Tinto’s expected share of titanium dioxide slag production in 2018 remains at 1.1 to 1.2 million tonnes.

Guidance for Rio Tinto’s expected share of boric oxide equivalent production in 2018 is unchanged at 0.5 million tonnes and guidance for uranium production in 2018 is unchanged at 6.2 to 7.2 million pounds.

EXPLORATION AND EVALUATION

Pre-tax and pre-divestment expenditure on exploration and evaluation charged to the profit and loss account in the first nine months of 2018 was $341 million, compared with $297 million in the first nine months of 2017. Approximately 46 per cent of this expenditure was incurred by central exploration, 37 per cent by Copper & Diamonds, eight per cent by Energy & Minerals and the remainder by Iron Ore and Aluminium.

There were no significant divestments of central exploration properties in the first half of 2018.

Exploration highlights

Rio Tinto has a strong portfolio of projects with activity in 16 countries across some eight commodities. The bulk of the exploration expenditure in this quarter was focused on copper targets in Australia, Canada, Chile, Kazakhstan, Mongolia, Namibia, Papua New Guinea, Peru, Serbia, Uganda, United States and Zambia. Mine-lease exploration continued at a number of Rio Tinto managed businesses including Pilbara Iron, RTFT, Oyu Tolgoi and Weipa.

A summary of activity for the quarter is as follows:

(1) Formerly Forte a la Corne