Rio Tinto: Tracking to plan

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

17 October 2019, 11:30 AM

Sectors Covered:

Mining, Energy

• RIO posted an overall steady 3Q operational result.
• Iron ore shipments rebounded in 3Q, up 10% and slightly ahead of our estimate.
• Mined copper was also slightly above our estimates, with good performances from Escondida (best quarter in a while) and Kennecott (volatile grade during cutback).
• Only two changes to CY19 guidance, with RIO downgrading bauxite and alumina.
• RIO is trading near fair value, but we expect near-term iron ore volatility could uncover a better entry point.
• Only small changes to our estimates post a steady 3Q result.

3Q19 Recap

RIO posted a reasonable operational performance for 3Q. The key highlights were:

• A rebound in Pilbara iron ore shipments +10% on previous quarter to 86.1mt (vs Morgans 84.0mt).
• RIO's Pilbara operations have recovered from a rough first half, and now look on track for CY19 guidance of 320-330mt (100% basis).
• 3Q also saw positive performances from Escondida and Kennecott, helping to underpin a steady quarter in copper.
• The drag on the 3Q result came from the aluminium division, with downgrades to full year guidance to bauxite (now 54mt, was 56-59t) and alumina (now 7.7mt, was 8.1-8.4mt).
• Aluminium is also expected at the lower end of guidance, with a weak demand environment and surprisingly small impact to Chinese supply from planned industry reforms.

View our full report for a more detailed recap (Morgans clients only).

Uncertainty over iron ore demand

While the short-term outlook is uncertain, we view the iron ore price as potentially sensitive to growing weak demand signals from China.

We expect this risk is significant given the spot price is already trading ~40% above the marginal cost of production, and with Brazilian/Australian seaborne supply recovering.

This is particularly important for RIO, given an +/-10% move in iron ore price impacts EBITDA by US$1,566m.  

Reasonable multiple

Any volatility in iron ore prices would in our view likely generate a better entry point for investors.

Even at its current share price we do not view RIO as expensive, trading on 5.5x FY20F EV/EBITDA with a dividend yield of ~7%. This falls in line with the multiple of its global peers, along with a higher dividend.

We see RIO's dividend profile as reinforced by the company’s low capex commitments, with Oyu Tolgoi underground expansion, Zulti South and Resolution all progressing slower than originally expected. 

Maintain Hold rating

We maintain a positive view on RIO, but are waiting to see if we get a better entry point.

Only minor adjustments to our estimates were made post the 3Q result and revised bauxite/alumina guidance. This has seen our target price increase marginally to (access by Morgans clients only).

The key risk to our call is metal price volatility. We see some potential for RIO to add new growth to its portfolio via acquisition, although a significant transaction seems unlikely.  

More information

Morgans clients can login to view our detailed report and updated share price target for Rio Tinto (RIO). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.