Rio Tinto: Is there still an appetite for acquisitions?

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

21 April 2023, 7:00 AM

Sectors Covered:

Mining, Energy

• Rio Tinto (ASX:RIO) flexed shipments to come in ahead of estimates for the Pilbara, while production was slightly behind.
• Copper guidance for 2023 was reduced following a soft 1Q from Kennecott and geotechnical issues at Escondida.
• RIO has exciting growth options, but all appear long dated, leaving us expecting further strategic acquisitions.
• Trading close to fair value, we maintain our HOLD rating with a (login to view) Target Price.

1Q’CY23 operational snapshot

On balance a quarter with few surprises, outside of a cut to copper guidance.

1Q23 Pilbara iron ore production was in-line at 79.3mt (vs consensus/MorgE 79.9mt/80.0mt) was -11% qoq on typical wet season impact. RIO flexed 1Q shipments to 82.5mt, for -5% qoq. A reasonable 1Q23 result compared to the record sprint home in production we saw in 4Q22, with lower-than-usual weather impact offsetting some operational issues at Yandicoogina and Robe River.

A drawdown of stockpiles helped support an impressive 1Q23 sales result for the Pilbara, with shipments at an annualised 330mt run rate (against guidance of 320- 335mt). But our confidence in this run rate, and RIO’s productivity program (Safe Production System), would benefit from greater consistency in production.

A softer performance from RIO’s copper business, with 1Q23 group mined copper -14% vs consensus, leading RIO to cut 2023 mined copper production guidance to 590-640kt (from 650-710kt). Kennecott was again a drag, albeit offset by the increased equity in Oyu Tolgoi (OT), with RIO maintaining the concentrator would continue to operate at reduced rates in 2Q23. Escondida output was surprisingly flat, with change in mine sequencing following geotechnical issues in the open pit. 

The downgrade to 2023 mined copper guidance was an incremental negative. A larger catalyst for RIO will be how OTUG performs as it ramps up mining and the construction phase matures. It is too early to assess its early performance.

The ali business was mixed in 1Q23, with bauxite volume of 12.1mt -8% qoq on weather impact to Weipa, while group alumina output was -4% qoq on outages at QAL and Yarwun. Aluminium production was in-line and flat qoq. 

Minerals were mostly steady, outside of weather impact at IOC (Iron Ore Company of Canada).

Analysis

In an operational result with few surprises our focus returns to the bigger picture. RIO is in robust shape and has some exciting innovation at the lab stage (ELYSIS and Nuton) as well as a portfolio of greenfield projects (Rincon, Winu, Simandou, and Resolution) but commercialising any of these will take considerable time.

We see this as leaving RIO’s current growth profile as undersized. Cash flow from resource projects can be harvested for shareholders, but at some point growth needs to come back on the agenda. 

Certainly not an issue facing RIO alone, with a number of its large-cap mining peers in a similar position. But it does leave us with the view that RIO might consider further acquisitions in base metals or battery minerals, following on from its recent acquisition of TRQ.

Forecast and valuation update

We have updated our estimates for the 1Q23 operational result, and further reduced our forecasts for Kennecott to accommodate the updated guidance.

We have also pulled our 2023 Pilbara shipments forecast back to the midpoint of guidance.

Investment view

Trading just ahead of our Target Price of (login to view) we maintain our HOLD rating.

Risks

Productivity, political and social risk. Metal demand drivers such as China growth.

Find out more

If you would like more information, please contact your adviser or nearest Morgans office. 

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