Rio Tinto : Third quarter 2018 operations review

Third quarter operations review

Rio Tinto releases third quarter production results

16 October 2018

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."

Q3 2018	vs Q3 2017	vs Q2 2018	9 mths	vs 9 mths
2018	2017
Pilbara iron ore shipments(100% basis)	81.9	-5%	-7%	250.7	+4%
						Mt
Pilbara iron ore production(100% basis)	82.5	-3%	-3%	251.2	+4%
						Mt
Bauxite	12,700	-1%	-4%	38,631	+4%
						kt
Aluminium	880	-1%	+3%	2,584	-3%
						kt
Mined copper	159.7	+32%	+2%	455.8	+38%
						kt
Titanium dioxide slag	297	-9%	+28%	822	-16%
						kt
IOC iron ore pellets and concentrate	2.9	-9%	+231%	6.1	-27%
						Mt
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.

IRON ORE

Rio Tinto share of production (million tonnes)

vs Q3 2017	vs Q2 2018	9 mths	vs 9 mths
2018	2017
Pilbara Blend Lump	20.6	-1%	-6%	63.2	+6%
Pilbara Blend Fines	29.9	-1%	-4%	90.9	+7%
Robe Valley Lump	1.5	-6%	+3%	4.5	+0%
Robe Valley Fines	2.7	-5%	+5%	8.4	+13%
Yandicoogina Fines (HIY)	14.4	-0%	+1%	42.6	+3%
Total Pilbara production	69.1	209.7
Total Pilbara production(100% basis)	82.5	251.2
Pilbara operations

Q3 2018

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 AutoHaulTMis 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)

vs Q3 2017	vs Q2 2018	9 mths	vs 9 mths
2018	2017
Bauxite	12,700	-1%	-4%	38,631	+4%
Alumina	1,972	-1%	-1%	5,960	-2%
Aluminium	880	-1%	+3%	2,584	-3%
Bauxite

Q3 2018

Rio Tinto Aluminium

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.