Rio Tinto: Soft Q1 could repeat in Q2
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 21 April 2022, 8:00 AM
- Sectors Covered:
- Mining, Energy
- A weak start to the year for Rio Tinto (ASX:RIO), with its operational and productivity challenges remaining a drag on expectations. Although at the moment more than trumped by robust metal prices which are more than offsetting.
- Iron ore, copper and aluminium volumes all fell short of consensus estimates and were all down in the period.
- We maintain a Hold rating on RIO with revised (login to view).
Q1 trails estimates
1Q22 volumes across iron ore, copper and aluminium trailed consensus estimates and were all down in the period. Although RIO did maintain all 2022 guidance.
Pilbara iron ore shipments in 1Q22 of 71.5mt (-16% qoq) came in well below consensus 76.4mt and MorgE 73.6mt.
Despite setting a record for material moved, RIO produced the lowest iron ore volumes since 2014. We attribute this disconnect to the additional stripping needed to maintain production from aging mines while RIO waits for the 2Q22 startup of Gudai Darri (critical replacement mine).
Also likely to hurt margins in 1H22 was the high proportion of low-grade SP10 product sold by RIO despite the lower overall shipments, which stayed at 18% of sales. We see keeping Gudai Darri on schedule as critical to RIO achieving its 2022 iron ore guidance.
While comfortable with the expected timing, RIO did flag a number of commissioning risks it is combating at the new mine (bottlenecks/COVID/etc).
Copper (mined) also disappointed in 1Q22 at 125kt (-6% qoq) vs consensus 137kt vs MorgE 139kt. Lower output from Escondida drove the miss, with a -7% drop in throughput as productivity impact from 2 years of heavy COVID impact to the giant copper mine gradually builds.
Oyu Tolgoi open pit was slightly behind while Kennecott came in ahead on improving grades post wall cutback.
Aluminium also came in below estimates in 1Q22 at 736kt (-3% qoq) vs consensus 769kt vs MorgE 803kt. The lowest ali volumes since 2006, although more than offset by ongoing ali price strength. We expect ali volumes to also pickup in 2H22 after the restart of Kitimat smelter in mid-2022.
Everything else… Bauxite 13,625kt (vs consensus 13,625kt vs MorgE 13,103kt). Alumina 1,901kt (vs consensus 2,033kt vs MorgE 2,036kt). IOC 4.1mt (vs consensus 4.3mt vs MorgE 4.5mt).
Salt 1,595kt (vs consensus 1,367kt vs MorgE 1,368kt). Titanium dioxide 273kt (vs consensus 273kt vs MorgE 300kt). Diamonds 991kct (vs consensus 1,307kct vs MorgE 1,080kct).
2022 numbers already under pressure
A similar performance in 2Q22 for both iron ore and copper now appears likely. For iron ore, Gudai Darri won’t start to ramp up until the second half. While in copper we don’t see any quick fixes to reverse the building COVID impact to productivity.
This sets up for further downside pressure on consensus estimates. According to Visible Alpha, 2Q22 iron ore consensus of 80mt (vs 71.5mt 1Q22), and 2Q22 copper consensus of 140kt (vs 125kt 1Q22).
Adjusting our forecasts for a flattish 2Q22 highlights the size of catch up needed in the second half to achieve RIO’s maintained 2022 guidance, especially in iron ore.
Forecast and valuation update
We have trimmed our 2Q22 Pilbara iron ore volumes and FY22/23 Escondida throughput assumptions post the 1Q22 result.
Post these changes, and updating our model for 1Q22, we have revised our valuation to (login to view).
Volumes may disappoint but RIO’s fortunes remain much more sensitive to robust metal prices, with booming FCF generation and bumper dividends set to continue despite the challenges facing RIO’s business.
Potential consensus and guidance downgrades vs an attractive FCF and yield, we ultimately see RIO as trading close to fair value and maintain our Hold rating.
Guidai Darri startup (Q2). 2Q22 production result. 1H22 earnings/dividend result.
The key risk to our call is the COVID risk to RIO’s key markets and operations
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