Cards are stacked against Rio Tinto: Weak iron ore prices, inflation and covid

Rio Tinto (ASX: RIO) faces an uphill battle, squeezed between the recent decline in iron ore prices, a surge in staff absenteeism and rising cost inflation. The company's stock slumped -4.1% as the market opened.

At least for now, June quarter iron ore production was a solid 78.6m tonnes, up 4% compared to last year. The rise was supported by maiden production coming from the Gudai-Darri project in Western Australia.

Iron ore guidance

Rio Tinto expects full-year iron ore shipments to be within the range of 320m to 335m compared to 322m in 2021. Though, subject to several assumptions including weather conditions and no more covid-related restrictions. 

The Gudai-Darri Iron Ore Project hit production status in June 2022 and considered to be Rio Tinto’s ‘most technically advanced mine’. Production is ramping up and expected to yield improved volumes and product mix in the second-half of 2022.

Iron ore prices deteriorated in the first-half of 2022, with Rio Tinto achieving average prices of US$110.9 compared to US$154.9 a year ago.

Unit cost guidance for the flagship iron ore division was unchanged at $19.5 to $21.0 a tonne. But this was based on a downgraded Australian/US dollar guidance of 71 cents from previous 75 cents assumptions.

Covid and weather risks

First-half shipments fell -2% compared to last year due to industry-wide challenges including labour shortages, covid disruptions, delays in mine replacement projects and significantly higher than average rainfall in May. 

“We are currently experiencing elevated levels of unplanned absences at our Pilbara operations due to COVID-19 case spikes in Western Australia,” Rio Tinto said in the quarterly update. 

Inflation impact

High inflation will make a small dent on Rio’s underlying earnings, expected to result in pre-tax costs of around US$400m in the first-half of 2022. 

Rio Tinto 12-month price chart