Rio Tinto: Positioned to weather the storm

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
20 April 2020, 12:50 PM
Sectors Covered:
Mining, Energy

  • Strong 1Q20 overall, with solid group production and reduced 2020 capex plans, versus lower copper guidance this year.
  • Mined copper guidance revised to 475-520kt (was 530-570kt), and refined copper guidance to 165-205kt (was 205-235kt).
  • 2020 capex guidance cut to US$5-$6bn (from US$7bn), with spending delayed.
  • Development work at OTUG has slowed down due to Covid-19 restrictions, pushing back within the previously revised 16 to 30 month delay.
  • Concern around short-term metal prices for the sector remains, but we maintain our preference for RIO with an Add rating and an increased price target (login to view price target).

Solid 1Q20 production 

A good start to the year for RIO, with 1Q20 Pilbara iron ore shipments of 59.9mt (+3% pcp) coming in 4% above MorgansE, with the Pilbara operations posting a good performance through the wet season, overcoming Tropical Damien. In copper, Escondida again maintained good volumes (86.2kt vs 85kt MorgansE) with throughput still successfully offsetting falling grades, while Kennecott and Oyu Tolgoi open pit both trailed. RIO's ali division continues to suffer from lower demand, although 1Q20 alumina (flat pcp) and aluminium (-2% pcp) volumes were in line with forecasts on persisting low automotive industry demand. Bauxite was the surprise again, 13.8mt in 1Q20, on a good operational performance and growing Chinese import dependence.

Trimmed copper guidance 

We had expected cuts to 2020 guidance for IOC, RBM and ali volumes on the back of impacted operations from Covid-19 restrictions in Canada and South Africa, so was positive to see no change (while IOC guided to some change in product mix on lower demand). Disappointing, but not unexpected, were the revisions to copper guidance with Covid-19 restrictions expected to reduce Escondida output, while Kennecott and Oyu Tolgoi also contributed incrementally to the reduced estimate. RIO expects 2020 mined copper of 475-520kt (was 530-570kt) and refined copper of 165-205kt (was 205-235kt).

Demand for high quality ore maintained 

With the restart of China's economy and some supply losses so far cushioning the fall in global steel activity (iron ore demand) we expect we are yet to see the low point for the bulk resource. However we are concerned by the potential for ex-China losses in demand to overwhelm recovering China demand for iron ore. RIO commented in its 1Q20 result that demand for its "high quality" iron ore product remains strong (i.e. high grade and tailored specifications to each steel mills needs). We expect the dominant marketability of RIO's products will likely be an important safeguard through any unexpected volatility.

In great shape with resilient dividend 

This will be a volatile year for commodities, but its flagship Australian operations appear well placed to avoid major impact from Covid-19 leaving RIO relatively we placed, adding to its balance sheet and margin advantages. Given current conditions, we see resources as offering a more attractive dividend profile than several traditional yield-offering sectors. We maintain our Add rating. with a decrease in Morgans house risk free rate to 3.0% (from 3.75%). The key risk is a larger-than-expected global macro impact from Covid-19.

More information

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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.

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