Good Production Results and a Jump in Iron Ore see RIO’s Run Continue

Shareholders of Australian mining giant, Rio Tinto (ASX:RIO), have had an exceptional run since early 2016. RIO, the world’s second largest supplier of iron ore, saw its share price rally from a low of $37 last February to $64 today.

And with positive production numbers announced today and higher-still iron prices, momentum seems to be on the miner’s side.

Rio Tinto Share Price – 12 month chart

Source: YahooFinance

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

This morning, the company reported fourth quarter production results. Iron ore shipments of 85.5 million tonnes were recorded for the quarter from its Pilbara operations. This was a 3% rise on the previous quarter and helped the miner recoup some of the lost momentum the division experienced earlier in the year.

The full year production number came bang in the middle of its target range, at 327.6 million tonnes. RIO also confirmed that it is sticking with its earlier 2017 guidance of 330-340 million tonnes for the year.

Rio Tinto CEO, J-S Jacques, commented on the numbers saying “We have delivered a strong operational performance in 2016, underpinned by our drive for efficiency and maximising cash flow. Our disciplined approach remains in place in 2017, with the continued focus on productivity, cost reduction and commercial excellence. This will ensure that we continue to deliver value for our shareholders.”

While management is happy to take credit, much of RIO’s good fortune is out of their hands.

In addition to RIO’s positive production results, the stock is trading higher today thanks to the iron ore price, RIO’s main export and the raw ingredient in steel production, surging to a two year high overnight. Prices have now risen by 6.1% in 2017 alone, hitting a high of US$83.65 a tonne.

These highs comes after a solid run by the raw material since it hit a price floor in 2015, on concerns of slower economic growth in China and weaker steel demand from the country, plus there being adequate inventories.

However, commodity prices do fluctuate and caution should be applied to any investment decision here and not be based on spot prices alone. Seek professional financial advice before choosing to invest.

Since then iron ore prices more than doubled as Chinese demand proved to be higher than was anticpated.

But now there are now conflicting opinions over whether the recent highs will stay, or whether questionable fundamentals will dictate lower prices.

The price rises over the past week don’t appear to be due to a shift in fundamentals, rather an improved sentiment towards iron ore and more specifically, anticipated Chinese steel production. That’s despite the Chinese government vowing keep taking action to to cut capacity. Being a raw ingredient in steel making, iron ore is vulnerable to shifts in demand for steel.

Yet two factors are at work against further high prices – greater supply and reduced demand.

Increased supply will come as major producer, Vale, begins production at its largest mine this year, all the while stockpiles at China’s ports are at record high levels. This will likely lead to an easing of demand later this year, say Barclays. The bank sees current high prices as nothing but a blip – not a new normal price level.

Note that RIO is currently the most expensive it has been for three years. That is, when we consider its share price in relation to the earnings it generates – it has a P/E ratio of 15. This may not look high compared to other ASX listed stocks, but is relatively high for Rio Tinto.

For investors looking for income from dividend paying stocks, RIO is currently paying a 3.3% yield, fully franked. The company cut its most recent dividend, paid in September, by almost 60% from the prior year as the company suffered from a fall in earnings.

For now, it remains to be seen whether the share price rise will continue in 2017, and beyond, or whether dividends will be raised back to previous levels.

Later this month Australia’s two other major iron ore producers, BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG), will report their own quarterly production numbers. Analysts are anticipation near-record quarterly production numbers from the pair and RIO’s results render support to their case.