- Solid 4Q performance from Rio Tinto (RIO)
- A strong final quarter saw group mined copper production comfortably beat the top end of RIO's 2018 guidance range
- RIO's flagship Pilbara iron ore operations also delivered healthy volumes at the upper end of guidance
- Volumes from RIO's ali division remained flat, outside of bauxite. We expect weak pricing and persistent cost pressures to be a focus area in next month's result.
Copper performs strongly
4Q mined copper production surprised on the upside, with RIO producing total mined copper of 177.8kt (up 20% on the previous quarter). This was driven by ramping up volumes from Escondida (full year 350kt, +29% vs 2017) following the ramp up of an additional concentrator (and in an absence of strike activity), and solid output again from RIO's Kennecolt operations (elevated grade and throughput) which finished the year with total production of 203.9kt, +37% vs 2017. This saw group mined copper for 2018 of 633.5kt, above guidance of 510-610kt.
Consistent with our existing forecast of 576kt for 2019, RIO outlined 2019 guidance of 440-600kt of mined copper.
Pilbara iron ore firing on all cylinders
Benefiting from the ramp up of Autohaul, RIO's flagship Pilbara iron ore operations produced 86.6mt (vs Morgans est. 85.4mt). Full year shipments of 338mt (100% basis) came in at the upper end of 330-340mt guidance, in line with previously flagged expectations from the company.
2019 will reflect the upgrades RIO has made to its system in the Pilbara with higher guidance of 338-350mt. Tempering our enthusiasm we have trimmed our own 2019 forecast to 344mt (was 360mt).
Ali division not a highlight
Outside of still healthy bauxite volumes supported by the early startup of Amrun (11.79mt, -7% vs 3Q), RIO's alumina and aluminium production drifted lower in 4Q. We expect division earnings to also trail in next month's full year result, with still lacklustre realised bauxite and alumina prices (the latter significantly linked to aluminium prices under legacy contracts).
In 1H18 we became excited over the upside to ali pricing, which failed to translate through to rising index prices and RIO earnings.
RIO has built itself into an incredibly strong position, after a multi-year process of refining and streamlining its business. At the end of this process time will tell what future direction RIO's overarching strategy takes, supported by a substantially recovered earnings base and refreshed management team.
In the meantime, strong fundamentals have been matched by a positive share price performance. Given the current share price is approaching our share price target we downgrade our recommendation from Add to Hold. The key risk to our call is commodity prices.
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