Sales of iron ore surge, but copper production drops.
Global mining behemoth Rio Tinto (LSE: RIO) today released an operations update for the first quarter of 2010.
The boom from Beijing
Between January and March, Rio produced 43.4 million metric tons of iron ore, up 39% on the 31.2 million tons mined in the same quarter of 2009.
This growth was driven largely by demand from Chinese steelmakers, and by heavy rains disrupting its output in the first quarter of 2009. However, output of iron ore was down 8% on the 47.2m tons mined in the final quarter of last year.
Thanks to rising prices and improving demand, Rio expects to produce 8% more iron ore this year, at around 234 million metric tons. Likewise, the world's second-largest miner reported higher production of bauxite (used to make aluminium), gold and hard coking coal.
Then again, the Chinese economy grew by a staggering 11.9% in the first quarter of 2010, its fastest rate in almost three years. This raised fears that the world's third-largest economy may be in danger of overheating, leading to higher inflation, interest rates and exchange rates.
Another problem for the Anglo-Australian miner is that its copper output dropped by a sixth (16%) and uranium output dived 20% over the quarter. Nevertheless, Rio raised its 2010 production forecast and said that its long-term outlook was very strong.
As I write, Rio's shares have dipped 1% at 3,926p.
More growth to come?
One big positive for Rio's future is its recent negotiations to end forty years of pricing iron ore on yearly contracts.
Steelmakers in China and Japan have already agreed to move to quarterly pricing with Rio's mega-rivals BHP Billiton (LSE: BLT) and Vale. When Rio's new quarterly contracts kick in, they should boost returns for the world's third-largest miner.
However, Rio recently suffered a setback when four of its employees in China were found guilty of industrial espionage and sentenced to between seven and 14 years in jail. In addition, the miner faces EU regulatory hurdles as it attempts to merge its iron-ore mining operations in Pilbara, Western Australia with those of BHP Billiton.
To me, Rio is a pure bet on two trends: a continued boom in China, and the restoration of growth in OECD markets. If industrial output in the developing world continues to recover post-recession, then higher commodity prices will mean bumper profits for Rio's owners.
At present, Rio has a market cap of £60 billion, with its shares trading on a price-earnings ratio of 14.7 and yielding a tiny 0.9%. For me, that's too high price to pay for a binary bet on China and world growth, even for a bellwether mining stock. With Rio, a lot of growth is already baked in
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