Focus turns to BHP after Rio shares tumble

INVESTORS are hoping BHP Billiton can follow today the strong lead from Fortescue Metals Group into reporting season, and avoid the sort of production downgrades dumped on the market by rival Rio Tinto.

INVESTORS are hoping BHP Billiton can follow today the strong lead from Fortescue Metals Group into reporting season, and avoid the sort of production downgrades dumped on the market by rival Rio Tinto.

Rio shares slipped rapidly yesterday as investors reacted to an underwhelming quarterly result from the company's flagship iron ore division and downgrades to full-year production guidance in three other important commodities.

Rio is now forecasting weaker full-year production of copper, hard coking coal and thermal coal compared with the guidance it was offering just three months ago.

Full-year guidance for iron ore production, which delivers the bulk of Rio's profits, remains unchanged at 250 million tonnes, and yesterday the company was spruiking its highest first-half production of iron ore.

But many investors were left disappointed by the iron ore division's performance during the three months to June 30.

Rio's global iron ore network - including joint venture partners - produced 62 million tonnes during the quarter, below the 64 million tonnes that were predicted by several analysts, including Deutsche Bank.

Rio's share of that production was 48.6 million tonnes a result that was partially hampered by a scheduled equipment shutdown at the Cape Lambert port.

While that result was better than the cyclone-affected March quarter, it was poorer than the June, September and December quarters of the previous year.

It looked even worse when compared with the June quarter results published earlier in the day by Fortescue, which revealed better-than-expected iron ore production, and successful achievement of its goal to export more than 55 million tonnes in 2011-12.

The impact on Rio's share price was instant: the stock slipped by 90?, or more than 1.6 per cent, in the space of an hour.

After touching $55.15, it closed at $54.44, 5? lower than Monday's close.

The Rio chief executive, Tom Albanese, said market conditions had deteriorated in recent months, but he stressed he was confident Rio's businesses were resilient to the volatility.

"Global economic conditions and sentiment dropped markedly in the second quarter. We are keeping a close eye on the pace of the US recovery, the continuing eurozone crisis and the impact of efforts to stimulate the Chinese economy on the markets that we serve," he said.

The big resources stocks have suffered steep share price declines over recent months, amid fears demand for commodities will fade as China's pace of growth slows.

But the world's biggest investor in resource stocks, BlackRock, said the sector could enjoy some relief soon as investors realised China was undergoing "the softest hard-landing in history".

"We feel there will be some levelling-off of attitudes towards commodities, particularly as-and-when people become more convinced that China, the main engine, is not about to collapse in a heap," the BlackRock chief investment strategist, Ewen Cameron Watt, said.

"The bear market in resources stocks has certainly helped the majors in the sense that they're the people that can get the finance and a lot of marginal projects will fall by the wayside."

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