Rio Tinto: Solid Q4 and iron ore upgrade

About the author:

Author name:

By Adrian Prendergast

Job title:

Senior Analyst

Date posted:

18 January 2023, 7:30 AM

Sectors Covered:

Mining, Energy

• A steady 4Q22 operational result from RIO, while we have applied higher long-term iron ore price assumptions to our estimates.
• Record Q4 iron ore production saw RIO achieve its 2022 guidance.
• All segments achieved 2022 guidance, outside of alumina which fell short.
• Pilbara unit costs expected to be slightly above guidance in 2022.
• Closure liability provisions increase of US$1.3bn pre-tax in 2022, mainly non-cash.
• We maintain a HOLD rating on RIO, with a (login to view) Target Price.

Solid end to 2022

A healthy 4Q22 operational result, with most segments in line with guidance (although largely in the lower half of the range), besides alumina which fell short. 

RIO set a new record in Pilbara production that delivered 2022 production of 321.6mt (vs MorgansE 322mt / Visible Alpha consensus of 322mt), in line with guidance for the lower end of 320-335mt. RIO flagged that 2022 unit costs were expected slightly above previous guidance in a new range of US$21-$22.5/t. 

Group mined copper in 4Q22 was in line our estimate at 131kt, but trailed consensus 143kt. A solid performance from Escondida, which saw an increase in grade, while Oyu Tolgoi open pit offset the gains.

Refined copper tonnes remain impacted by Kennecott, with major maintenance not planned until 2Q23. Oyu Tolgoi underground (OTUG) first production was pulled forward to 1Q23 (from 1H23) with development rates of the 19 drawbells progressing smoothly. 

The performance of the ali division disappointed. With aluminium and alumina production the only areas of output to shrink for RIO in 2022. The performance of the Kitimat (Canada) and Boyne (Australia) smelters remain under pressure, although RIO remains confident it can iron out both during 2023.

RIO is progressing plans to develop a starter 3ktpa lithium carbonate plant at its Rincon project (Argentina), with production expected in 2024. While small-scale, the plant will test the same design as a planned larger development.

Ahead of its full year result, RIO outlined that higher long-term inflation assumptions had led to an increase in closure liability provisions that would impact pre-tax underlying earnings in 2022 by US$1.3bn (US$0.4bn in 1H22). The added expenses are expected to be mostly non-cash adjustments.

Realised prices reported in the 4Q22 result were broadly in line with expectations.

Analysis

A result with few surprises. The Pilbara iron ore performance was reassuring that RIO has found a dependable base in output, supported by a smooth ramp up from Gudai-Darri.

While permitting remains the major challenge and risk for RIO’s US$2- $3bnpa of mine replacement work in the Pilbara, required to sustain capacity, which has not shown any sign of improvement post the Juukan Gorge incident.

Time will tell if RIO can remain on the capex treadmill to sustain Pilbara shipments at 320-335mt, or if it might consider opting to shrink its operating scale and forgo the heavy annual reinvestment. We expect the former to be RIO’s key preference.

Forecast and valuation update

We have made adjustments to our iron ore, ali and copper estimates post the 4Q22 result and 2022 update.

The larger change to our numbers came from an increase in our long-term iron ore price assumptions (now US$72/t real, was US$65/t).

Investment view

Post the offsetting changes to our forecasts our valuation-based Target Price has increased to (login to view).

Although riding surging investor confidence on a possible China re-opening, this already looks priced in with RIO trading moderately ahead of our estimated TSR. We maintain a HOLD recommendation.

Risks

The key risk to our HOLD call remains China, and the pace of economic recovery (an important demand driver for metals).

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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.