Rio Tinto: Turning green or burning green?

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
23 October 2021, 8:00 AM
Sectors Covered:
Mining, Energy

  • Rio Tinto (ASX:RIO) is accelerating its plans towards decarbonizing, announcing that it plans to spend US$7.5bn in capex between now and 2030 on cutting emissions.
  • As a result RIO is targeting 50% reduction in Scope 1 & 2 emissions by 2030 (5 years earlier than previous plans).
  • This marks a material change in strategy for RIO, where we thought the void would be filled by a clearer push into new metals or acquisitions.
  • We have downgraded our valuation to account for the increased capex and maintain our Hold recommendation

Investor day

Rio Tinto's (ASX:RIO) Investor Day was heavily focused on ESG, which was almost the only subject discussed during the first half of the ~4 hour briefing. Revealing a plan to spend US$7.5bn towards decarbonizing its business and innovating green steel.

RIO now targets a 50% reduction in Scope 1 & 2 emissions by 2030 (was 2035), and a 15% reduction by 2025 (was 2030), and net zero by 2050.

The plan is to spend US$500mpa through 2024, initially focusing on electrifying RIO’s flagship Pilbara iron ore operations. And then increase annual spend on wider environmental projects for a total of US$7.5bn by 2030. Also focusing on its aluminium smelters ex-Canada (already hydro supported) and its copper mines. 

Outside of ESG, RIO also outlined its new productivity push, called RIO Safe Production System. Aiming to improve its operational performance across the global business with a bottom-up, shared thinking/experience, simplified approach – which does sound eerily similar to the majority of other productivity growth plans we have heard in the past from the major miners.

This leaves us on the lookout for tangible results before gaining confidence in the plan. RIO is starting with Kennecott, where there should be some easy wins.

Analysis

We had recognised that there was a gap in RIO’s fundamentals, but thought this would instead be filled with a push into new metals or material acquisitions (we saw a company like NCM as a good target for RIO, which will be 50% copper by 2030).

Instead RIO is plunging into rapid decarbonization. The difficulty is the US$7.5bn capex RIO plans to spend is carried at 100% in our numbers, while the return profile is long-dated at best. As an example, green credits in the aluminium market are only at a discussion phase, leaving an uncertain return on investment.

The push into decarbonization is similar to that we have seen from FMG. Although FMG is more aggressive, spending 2-3x the amount RIO has indicated.

Forecast and valuation update

We have applied the increased capex to our forecasts, which has impacted free cash flow over the next 8 years.

The added capex has resulted in our target price being reduced to (login to view).

Investment view

A more measured spend vs smaller peer FMG, but we are similarly uneasy about RIO also taking the position of innovator rather than early adopter (with the latter historically proving vastly more capital efficient).

We maintain our Hold rating on RIO which is trading at a modest discount to our target price.

Price catalysts

Q4 operational performance.

Iron ore price trends.

Risks

COVID-related risk to commodity demand.

Operational risk on core assets given recent underperformance, which could continue.

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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.


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