Rio Tinto: Metal prices offset soft start
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 20 April 2021, 3:30 PM
- Sectors Covered:
- Mining, Energy
- Overall a reasonable 1Q21 operational result from Rio Tinto (ASX:RIO), with lower iron ore shipments and mined copper production as expected.
- Weather impacted RIO’s operations in 1Q21, in particular its flagship iron ore business in the Pilbara where travel restrictions also created a labour shortage.
- Lower volumes more than offset by upgrades to iron ore and aluminium prices.
- COVID-19 remains a key challenge, dragging on Escondida’s output, slowing OTUG development, and adding costs and unique challenges across RIO globally.
- Maintain our Hold rating with an upgraded target price (login to view).
Soggy 1Q21 for Pilbara as expected
1Q21 was a softer quarter vs 4Q20 in RIO’s core iron ore and copper businesses, but this was captured in our estimates. RIO posted 1Q21 Pilbara iron ore shipments of 64.6mt (RIO share) vs MorgE 64.6mt, down -12% QoQ with above-average rain during wet season impacting shipments.
RIO also struggled with the impact of travel restrictions in WA which saw labour shortages across its iron ore system. Pilbara replacement projects remain on schedule.
While activity is ramping up at Simandou (Guinea) with RIO receiving technical designs on infrastructure from Chinese design institutes. Work at the Simandou mine site is focused on cost cuts and opportunities to speed up timeline. Worth monitoring.
COVID-19 a larger challenge for copper
COVID-19 has been more of a challenge for RIO’s copper business. Group mined copper -9% QoQ to 121kt (vs MorgE 125kt).
The biggest impact was on Escondida (RIO’s largest copper asset) in Chile, where throughput and recoveries suffered on the sustained loss of ~30% of its workforce from COVID-19. This contributed to less material stacked on the leach pads and 6% lower feed grade.
COVID-19 has hurt Oyu Tolgoi Underground development (OTUG) in Mongolia, with China’s tight border controls hampering concentrate shipments and the 2-week hard lockdown holding up development activities and travel.
Some underground work continues but work on shafts 3 and 4 has been suspended for all of April and resumption is reliant on COVID-19 restrictions easing. This wont effect panel 0 (i.e. where mining starts at OTUG) but will impact panels 1 and 2.
RIO is going to provide an update once it better understands the implications for ramp up. Higher mined grades in the OT open pit did help the group. Kennecott had a mixed performance as expected, with transition ore hurting recoveries but higher grades from the south wall offsetting.
Price over volume
While roughly inline with our estimates, the 1Q21 result appears below consensus. Although we do not expect meaningful consensus downgrades to result given the sustained strength in key metal prices.
Accordingly we further upgrade our iron ore and aluminium forecasts (summarised later), leading to EPS increases (10-25%) for CY21-23. As a result our DCF valuation has increased (login to view revised target price).
Remains strong but fundamentals peaking
With the upgrade cycle still firmly intact, FCF yield 9%, and dividend yield 7%, we still see plenty of reasons to keep RIO in the portfolio. Particularly given the potential for sustained positive conditions supporting commodities.
But with that said, it is also hard to not view these strong fundamentals as peaking. Particularly with iron ore, copper and aluminium prices all above levels we consider sustainable over the long-term.
In the meantime on continuing strength we maintain our Hold rating. The key risk being metal demand drivers.
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