It was a soft first quarter from Rio Tinto (RIO), but an 8% reduction in our fair value estimate reflects an increase in assumed operating costs across all segments and a reduced copper production outlook. While costs are falling, we have re-evaluated the likely decline and believe we were being overly optimistic. We have tempered the degree to which we expect labour cost pressures to abate in sympathy with weaker commodity prices generally.
We've reined in our forecast copper volumes to tally with guidance for 500,000 to 535,000 tonnes mined, sharply lower than 2014's 615,000 tonnes mined. Lower grades at Kennecott reflecting a focus on de-watering is a key detractor.
Rio Tinto continues its efficiency drive, but cost cuts do not improve the relative competitive position as the whole industry curve is moving down, hence we maintain our narrow moat rating. It's founded on low-cost supply thanks to high-quality geological deposits and economies of scale. Fair value uncertainty remains high in recognition of outsized exposure to iron ore.
Quarterly equity iron ore production fell 6% sequentially to 59.4 million tonnes while the aluminium complex fell on average by 2% to 1.9 million tonnes of alumina and 0.81 million tonnes of aluminium. This was well below expectations for iron ore given wet weather and a train derailment. However, the Pilbara expansion remains on track for completion by end June and Rio Tinto says it will use inventory to drive the unchanged 2015 guidance for iron ore shipments of 350 million tonnes on a 100% basis.
Mined copper production rose 12% to 144,000 tonnes, though below expectations. A strong increase in coal sales volumes are of limited consequence to group earnings given the slim margins.
