Rio Tinto: Still finding a floor
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 18 October 2021, 11:30 AM
- Sectors Covered:
- Mining, Energy
- 3Q21 brought a second consecutive quarter with guidance downgrades in multiple areas, although not substantial revisions in order of magnitude.
- Rio Tinto (ASX:RIO) made it clear that it rates becoming the best operator as a top priority. We appreciate the focus given the drag recent operational performances have had.
- Pilbara guidance based on tight new mine schedules proves too optimistic.
- COVID is still impacting Mongolian operations, with another delay to OTUG.
- We maintain our Hold rating on RIO, still seeing some risks in 4Q21
A second consecutive quarter with multiple downgrades across key divisions, although the magnitude of the changes being smaller. It does remain indicative of the pressure that remains on RIO’s operations either due to COVID or a mixed operational performance.
3Q21 iron ore shipments 83.4mt (vs MorgE 85.0mt) +9% qoq, mined copper 125kt (vs MorgE 135kt) +8% qoq, and bauxite 14mt (vs MorgE 15mt) +2% qoq.
Guidance changes - a lot of changes to 2021: a) Pilbara iron ore shipments downgraded further to 320-325mt (was low end of 325-340mt); b) Mined copper downgraded to ~500kt (was 500-550kt); c) Refined copper downgraded to 190- 210kt (was 210-250kt); d) Copper C1 costs downgraded to 75-80c/lb (was 60- 75c/lb); e) Oyu Tolgoi underground expansion (OTUG) delayed further to Jan 2023 (was Oct 2022); f) Bauxite production downgraded to 54-55mt (was 56-59mt); and g) TiO2 guidance set at ~1mt (was n/a) after Richards Bay operations resumed.
Hurting RIO’s iron ore performance were continued tight WA labour conditions, which has caused some delay in the startup of new mines Gudai-Darri (greenfield) and Robe Valley (brownfield). The production guidance downgrade was not a large one, but risk still remain in 4Q21. Unit costs unchanged at US$18-$18.5/t.
Varying issues at RIO’s three copper operations: 1) sustained COVID impact on Escondida’s performance with lower throughput/recoveries; 2) Better mine performance at Kennecott (grades/recoveries), although an outage at the smelter in September; 3) OTUG progress stalling with government talks and operations held up by heavy COVID impact in Mongolia.
Overall, a steady performance from RIO’s ali business, despite the modest downgrade to 2021 bauxite volumes. The story remains the size of aluminium price strength which has transformed the old Alcan business.
RIO management have been candid in 2021 about the short-term operational struggles and risk facing its Pilbara business, so the schedule slippage at Gudai-Darri and Robe Valley are hardly a surprise. Not cause for long-term concern but there is further risk in 4Q21 that in a worst case could see a third 2021 downgrade.
RIO’s dependence on Escondida for copper exposure is causing it considerable pain as the giant copper mine continues to suffer sustained COVID impact.
We see a need to get on the acquisition hunt to re-balance its concentrated business, but this appears unlikely while RIO is focusing so heavily on improving its operational performance and recovering its social licence.
Rising profitability in aluminium is a real positive. We are on the lookout for any signs RIO might seek to divest higher cost assets while they are profitable.
Forecast and valuation update
We have updated our forecasts to capture RIO’s updated guidance.
We are starting to see value emerge in RIO but given the size of recent iron ore volatility (which we expect to continue) we remain cautious with our investment view.
We maintain our Hold rating with a revised target price of (login to view).
Iron ore price volatility remains key short-term catalyst given exposure.
Chinese steel activity and various COVID impacts remain key risks.
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