Rio Tinto: The long path back
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 19 October 2022, 7:00 AM
- Sectors Covered:
- Mining, Energy
- A 3Q22 operational result that reminded us that there are no quick fixes to Rio Tinto’s (ASX:RIO) productivity issues across its global operations.
- Pilbara iron ore shipments were in line but production fell short of consensus. Ali division volumes trailed estimates, while copper was in line.
- Copper was inline with a strong performance from Escondida, while RIO reassured that OTUG is still on track for first ore in 1H23.
- We maintain an Add rating on RIO, with an unchanged (login to view) target price.
A downgrade to CY22 iron ore shipments guidance, with RIO guiding to the low end of its 320-335mt guidance. Although this is unlikely to trigger much of a change to expectations, with Morgans and consensus estimates already at 322mt and 321mt respectively.
3Q22 Pilbara iron ore production trailed (actual 82.9mt vs consensus 84.3mt), while shipments were in line at 84.3mt, +1% yoy. Disappointingly RIO reported unplanned rail outages at both Yandicoogina and Gudai Darri, with an investigation into a derailment at the latter.
Mined copper volumes were in line (actual 138kt vs consensus 139kt), +10% yoy, with solid output from Escondida which benefited from higher grades and recoveries. While mined copper guidance was unchanged, RIO did downgrade refined copper, attributing the decline to Kennecott.
A disappointing 3Q22 performance from RIO’s ali business, with bauxite (actual 13.7mt vs consensus 14.1mt), alumina (actual 1.8mt vs consensus 2.0mt), and aluminium (actual 759kt vs consensus 774kt) all trailing market expectations due to seemingly avoidable operational issues at various assets.
On the growth front, RIO sanctioned underground development at Kennecott, kicked off development of its Rincon lithium project, is on track for fire ore from Panel 0 at Oyu Tolgoi underground in 1H23, and is progressing the acquisition of TSX-listed majority-owned Turquoise Hill under a recommended bid.
Meanwhile work at Simandou has resumed, albeit with tension still existing with the Guinean government.
RIO reduced CY22 group capex guidance by US$500m to US$7.0bn, partly due to a falling Australian dollar (FX saving) and partly due to the timing of decarbonisation spend (albeit with the long-term budget unchanged).
The operational weak-points and guidance cuts are disappointing, but they alone are not material to RIO’s long-term fundamentals. Instead we remain focused on whether RIO can achieve sustainable operating changes to solve the productivity issues across its global business.
We think that lasting change, especially to productivity in a business this scale, is not something that can realistically happen quickly with weak quarters like 3Q22 likely to continue to occur in the meantime.
Forecast and valuation update
We have updated our estimates for the 3Q22 result.
Trimmed CY22 refined copper production.
Lowered group capex estimate to sit in line with new company guidance.
Putting the 3Q22 result into perspective, we still see RIO boasting solid earnings quality, dividend yield, balance sheet strength and trading at a discount to our (login to view) Target Price (unchanged).
We maintain our Add rating.
Chinese economic indicators.
4Q22 operational result.
Global macroeconomic risks (metal demand drivers) remain key to our assumptions.
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