The "weather put option" paid to any notion of a strong production start to fiscal 2011 for Rio Tinto (RIO). The implication for BHP's (BLT) output is also obvious. All major commodity groups suffered sharp volume declines versus the December quarter, the previous corresponding quarter, and even versus our tempered expectations. Australia's flooding rains were no secret, but the breadth and magnitude of the impact was a surprise. Compared to the December quarter, iron ore fell 16%, coking coal by 29%, other Australian coal by 21%, alumina by 8% and uranium by 56%.
Iron ore capacity in the Pilbara may have increased to 225 million metric tons annually, but during the first quarter of 2011, operations were disrupted by three tropical cyclones and widespread flooding. Severe monsoonal rains in Queensland saw declaration of force majeure at four coal mines since the end of 2010. It was in place until late February at three mines, and remains in place at the Hail Creek coking coal mine. Alumina production fell with the rain at Weipa and Gove, and there was only one month's production from uranium miner ERA to manage excess water in the tailings dam. Argyle diamond output also fell.
And there was no relief provided by offshore operations. Canadian iron ore reported lower truck availability and a crusher breakdown. Lower copper grades at Escondida in Chile, Grasberg in Indonesia, and at Kennecott, Utah, drove group mined production down 24%. Rossing uranium in Namibia experienced lower grades and extraction rates, as did Diavik diamonds in Canada. So much for diversification!
There is a silver lining. This is deferred production, not lost production. There will be some catch-up, and where there isn't, reserves are left to produce another day. Probably more importantly, the supply squeeze has benefited pricing. Spot coking coal price blasted through $350 per metric ton in January, versus a fourth quarter 2010 average closer to $225. Thermal coal trends around $125 versus the fourth quarter's $110, and iron ore hit over $180 per metric ton, versus a fourth quarter average closer to $140. At an average $4.35 per pound, first quarter 2011 copper prices are 10% ahead of the fourth quarter. It seems prices will offset volume losses to a considerable extent.
The weak first quarter softens our valuation marginally, and we soften our fiscal 2011 and 2012 earnings forecasts by around 6%. The valuation change pales beside the share price, which has risen 12% since our last write-up, tempering somewhat our front foot stance.
Whether it was the poor quarter or whether Rio Tinto has just had a change of heart, there was unusual candour from this mining behemoth on the exploration front. The company highlighted intercepts of high-grade copper mineralisation at its La Granja copper project in Peru, near surface high grade copper and silver mineralisation at the Agua de Montana area and encouraging intersections of nickel-copper-platinum-palladium mineralisation at a new prospect in Ontario. This is pleasing to hear, though more information would be greatly appreciated. Rio Tinto spent $192 million on exploration in the first quarter, nearly double the previous corresponding period.
The company also highlights its successful 52.6% majority purchase of Riversdale Mining Limited, delivering control of "significant tier-one coking coal projects" in Mozambique. Tier one in geological terms, but not necessarily from a sovereign risk perspective. It flags a quick start to accelerating development of the Benga project.
