Rio Tinto - Doing the hard yards in ESG

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
18 October 2020, 6:00 PM
Sectors Covered:
Mining, Energy

  • RIO posted a mixed 3Q20 result, with iron ore shipments trailing our estimates while mined copper was ahead of expectations. While ali division was in line.
  • The quarterly result included significant commentary and analysis on ESG factors effecting RIO’s business, suggesting the big miner was making positive changes.
  • 2020 capex and production guidance unchanged, outside of a small cut to TiO2.
  • All eyes on Mongolia, with the government declining the updated feasibility study on OTUG. We still see material political risk for this important copper asset.
  • We await a better entry point, with RIO trading too close to our target price (login to view target price).

ESG in focus

RIO is working hard to try and recover from recent events that have triggered management changes and a loss of stakeholder confidence and key management changes. This was evident in the quarterly, which devoted extensive focus to ESG factors concerning RIO’s business. We expect RIO to continue this good work as it progresses its hunt for a new CEO, with the changes in our view both likely to be cultural and permanent.

Iron ore shipments lag

3Q20 Pilbara iron ore shipments were softer-than-expected at 82.2mt (vs MorgansE 85.5mt vs Consensus 84.7mt) despite solid 3Q production of 86.4mt. RIO attributed the gap in production and sales to its efforts to catchup on maintenance it had yet been able to do due to previous Covid restrictions. We expect this to also impact Q4. RIO flagged that a strong anticipated 4Q performance from the major seaborne producers along with easing demand conditions were likely to see iron ore inventories build.

Copper performs in 3Q

RIO posted a strong 3Q mined copper performance at 130kt (vs MorgansE 128kt vs Consensus 116kt). Another strong performance from Escondida, with high throughput continuing to effectively offset grade decline, and Oyu Tolgoi open pit, which is still mining out a high grade zone. While we also received positive news that the Kennecott smelter was back online post an extended shutdown, and with the south wall push back still on track for March 2021 completion.

Maintain Hold recommendation

RIO maintained all 2020 capex and production guidance, with the exception of a small cut to TiO2 where it now expects to come in at 1.2mt (previously expecting 1.2-1.4mt). Post the 3Q20 result we have updated our forecasts to include lower iron ore sales, added short-term sustaining capex and marginally higher unit costs for iron ore. This has seen our valuation-based target price reduced (login to view), while our investment view that RIO is trading at too small a discount to our target price is maintained. We rate RIO as a Hold, with the key risk to our call being the potential for further global macroeconomic weakness stemming from Covid (key commodity demand drivers).

Find out more

Morgans clients can access further analysis by browsing the latest research on our client website. If you would like access or more information, please contact your adviser or nearest Morgans office. 

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team

Create trial account 

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.

  • Print this page
  • Copy Link