Commenting on Rio Tinto’s operating performance in the second quarter, Tom Albanese, chief executive, said, “Markets remained tough in the second quarter, as expected, particularly in aluminum. The production curtailments announced in January in this product group have started to take effect and are reflected in this report. We continue to press ahead with actions to reduce costs across the board, align production with demand, and bring down levels of net debt. We have successfully completed our $15.2 billion rights issue this month, and during the course of this year we have agreed divestments to the value of $3.7 billion.”
In the light of very difficult trading conditions, management has implemented a widespread program of closures and curtailments to reduce the cost of production. Bauxite production has been reduced by 5 million metric tons (mmt), high-cost alumina refining capacity has been cut, and a total of approximately 450 thousand metric tons, or 12% of smelting capacity, is expected to have been divested, idled or shut down by the end of 2009, including the anticipated cessation of primary smelting operations at Anglesey, the Beauharnois closure, and production curtailments at higher-cost smelters in Europe and Canada.
Over 80% of Rio Tinto Alcan’s capacity is positioned in the lower half of the industry cost curve. With these actions, 42% of Rio Tinto Alcan’s smelting capacity in the upper half of the cost curve has been either sold or curtailed.
It’s expected that cost reduction measures will lead to an improvement in margins against a backdrop of strengthening Canadian and Australian currencies. These foreign exchange effects, together with the non-cash impact of balance sheet translation movements and other non cash effects, are expected to have a negative impact on EBITDA in the first half of 2009.
Second quarter bauxite production was 14% lower than the same quarter of 2008, with production at Weipa down 19%. In April 2009, Rio Tinto Alcan announced the curtailment of annual production of bauxite at Weipa to 15 mmt (from 20 mmt in 2008) due to the sharp fall in alumina and aluminum demand and prices in recent months. Rio Tinto Alcan’s share of global bauxite production in 2009 is expected to be approximately 31 mmt, a decline of 11% from 2008.
Second quarter alumina production was 6% lower than the same quarter of 2008. Following production cuts at the Vaudreuil and Gardanne alumina refineries announced in January 2009, the annual alumina production rate has been reduced by 6% in 2009 compared with 2008.
The expansion and upgrade of the Sao Luis (Alumar) alumina refinery (Rio Tinto Alcan share, 10%) from 1.5 to 3.5 mmt per year is nearing completion, and first additional production from the expanded facility was realized in June 2009.
Minerals production continued to be affected by lower demand in line with reduced economic activity across all major regions. In addition, planned maintenance shutdowns occurred during the quarter. The first shipment of ilmenite ore from QMM (Madagascar) to Canada was made during the quarter.
A two-month summer shutdown will take place at QIT’s ilmenite mine and smelting operations in Canada in response to the current market uncertainty. At Richards Bay, one of the four furnaces is currently out of operation for a period of five months for a planned rebuild. A general decline in production volumes of approximately 14% across the Rio Tinto Iron & Titanium product portfolio is anticipated in 2009, compared with 2008.
During the first quarter of 2009, Rio Tinto divested its undeveloped potash assets in Argentina and Canada for $850 million. The profit on disposal is expected to be recognized within underlying earnings within Energy & Minerals evaluation projects, and is estimated to be $818 million pre-tax ($797 million post-tax).
Additional details are available at www.riotinto.com