* Q3 iron ore shipments up 6 pct on-year

* On course to ship 330 mln T of the commodity in 2017

* But cuts copper output guidance due to delays at Chile mine (Adds byline, analyst comment, detail on rail line and copper shipments)

By James Regan

Oct 17 (Reuters) - Global miner Rio Tinto on Tuesday said it had lifted its third quarter iron ore shipments by 6 percent after modernizing its haulage railway in Australia's outback, but cut its production target for copper due to delays at a major mine in Chile. Rio Tinto, which competes with Vale SA and BHP Billiton Ltd in the seaborne-traded iron ore market, maintained its target to ship 330 million tonnes of the steelmaking ingredient in 2017.

The strong quarter comes after a sluggish first half when bad weather and rail track maintenance crimped iron ore production.

"The business performed very well in the September quarter, with a strong quarterly production performance and a wave of productivity improvements embedded through our operations," Rio Tinto Chief Executive Jean-Sebastien Jacques said in a statement.

Iron ore shipments totaled 85.8 million tonnes in the third quarter versus 80.9 million in the same period a year ago, Rio Tinto said. UBS had forecast third-quarter shipments of 84.6 million tonnes.

The company runs about 200 locomotives on more than 1,700 km of track, hauling ore from 16 mines to four port terminals. It has been gradually pushing towards using completely driverless iron ore trains in 2018, speeding up journeys and eliminating driver fatigue.

Iron ore has traded between $53 and $95 a tonne this year and currently stands at around $63. Australia's Department of Industry, Innovation and Science expects prices to backtrack in the fourth quarter for a 2017 average at $64 a tonne. It sees a further retreat next year to $50 a tonne as Chinese demand for imported ore eases.

COPPER CUT

In other minerals, Rio Tinto cut its mined copper production guidance for 2017 to 460,000-480,000 tonnes from the 500,000-550,000 tonnes announced earlier, hit by the delayed ramp-up of extension work at its 30 percent-owned Escondida mine in Chile.

That reduction in the mid-point of copper guidance of 55,000 tonnes represents $390 million in lost revenue, based on current copper prices above $7,000 a tonne.

Rio Tinto is forecast to generate overall revenue of around $39.3 billion in 2017, a 15-percent increase over 2016, according to Thomson Reuters forecast data.

"Despite the softer copper headlines and lower guidance there is a positive story here: Escondida is coming back, albeit a tad slower than hoped," said Peter O'Connor, an analyst for Shaw and Partners in Sydney.