Updates: Market Ignores Rio Tinto’s Warnings, BHP Joins In

It was good timing for Rio Tinto to hold its quarterly investor update yesterday; the bounce on markets on reports of moves to try and fix the eurozone crisis offset an escalation in warnings from the company about the impact of the volatility on customer demand and sales.

The shares rose as the wider market jumped by nearly 2% as investors ignored Rio's latest, more detailed warning contained in the 2011 investor update seminar in Australia yesterday.

The comments represented a significant upgrade from commentary at the September seminar.

The shares ended up $1.32 or 2% at $63.27.

The update also had no impact on BHP Billiton shares which were up 80c at $34.85, a rise of just over 2% as both companies' shares were tugged higher by investors seeking to see the rosy side of the latest news from Europe.

Rio said that"continuing stresses in the euro zone and a weaker outlook for the U.S. economy are inevitably affecting customer sentiment, which has become more negative in recent months".

Rio CEO chief executive Tom Albanese said that "for the near term I am concerned about the general softening of prices when we continue to see cost escalation and strong currencies in Australia and Canada".

Albanese added that the impact of current economic concerns on the business is manageable unless financial markets deteriorate substantially.

At the last investor update in September (made in New York), Mr Albanese said, "We've been saying for quite some time that we expected to see patterns of increased price volatility amidst turbulent financial markets and that scenario is playing out.

"Our order books are full and pricing is strong, but it is noticeable that markets are somewhat weaker than they were six months ago. We are realistic and well-positioned for any number of scenarios - our high-quality growth programme is in full swing to capture the expected increases in longer-term demand, and our balance sheet is very strong and well able to withstand any near-term decline."

BHP's CEO, Marius Kloppers told the media yesterday European crisis was having a negative effect on bank financing.

Mr Kloppers said there had recently been a "fairly large change" in the way banks operated, which BHP Billiton had publicly predicted.

"We really started seeing the European conditions impacting, for example, trade finance, availability of LCs (letters of credit) and so on," Mr Kloppers told the media in a teleconference on an another issue.

"We expect that we'll continue to see an impact," he said.

In yesterday's update, Rio said that commodity prices are mixed at the moment.

"Spot iron ore prices have been volatile but have recovered some ground recently. Copper, coal and other Rio Tinto product prices are holding up with the exception of aluminium which is now priced well below the industry's marginal cost of production. "

Rio recently announced plans to close an aluminium smelter in the UK and to spin off or sale of 13 of its lower quality assets from this business. Those in Australia and NZ will be folded into a company called Pacific Aluminium that elsewhere will be sold.

"Rio Tinto Alcan has set out further details of its plan to deliver long-term EBITDA margins of 40 per cent in 2015 and increase shareholder value through operational improvements, proposed strategic investments including at Weipa (South of Embley) and Kitimat and streamlining the portfolio," the company said yesterday.

Rio indicated that the growing volatility had not caused it to cut its big capex program for this year and 2012.

"Full year capital expenditure in 2011 is expected to be around $12 billion, in line with previous guidance.

"Capital expenditure is set to trend upwards in 2012, with around $14 billion of investment in sustaining capital and approved growth projects already planned as Rio Tinto's high-quality growth programme gathers pace. Further project approvals may add to this level of investment, subject to Rio Tinto's rigorous approach to evaluating projects based on value."

And despite the obvious slowdown in global and Chinese steel production, the company is pouring on capacity in its iron ore business.

"Rio Tinto Iron Ore has raised its production capacity expansion target in the Pilbara in Western Australia by 20 Mt/a to 353 Mt/a by the first half of 2015. This will be achieved by the replacement and upgrade of a car dumper at Cape Lambert, as previously foreshadowed. The expansion from 283 Mt/a tonne 353 Mt/a remains subject to Board approvals.

"Rio Tinto continues to return excess capital to shareholders with more than $5 billion of its $7 billion share buy-back programme now completed. The Group's balance sheet remains strong, with estimated net debt at 31 October of $7.9 billion, a reduction of $0.7 billion since 30 June," Rio told the market.

Mr Albanese added that "Rio Tinto continues to be well positioned in current markets. Our cash flow generation remains high and we are selling everything we produce.

"The longer-term demand picture remains positive and we would expect to see additional supply constraints as a consequence of current financial uncertainty.

"The China growth story has a long way to run and, by utilising our strong balance sheet, we continue to invest throughout the cycle in high-quality growth options to meet this future demand."