Company Reports

We retain our AUD 112 per share fair value estimate for no-moat Rio Tinto after a solid start to 2024. First-quarter sales are broadly in line with our expectations. Rio’s share of shipments from its Pilbara iron ore operations, the main driver of earnings, was roughly 66 million metric tons, 5% below the same quarter of 2023 and 10% lower than the previous quarter. Inclement weather was the main driver. Management made no changes to guidance, and we continue to forecast 2024 Pilbara iron ore sales of roughly 280 million metric tons (its share), similar to last year. We also reiterate our forecast for 2024 unit cash costs in the Pilbara of roughly USD 23 per metric ton, about 6% higher than last year, driven by inflation.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt and diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The company’s largest customer by far is China, accounting for about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly for iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

No-moat Rio Tinto’s adjusted net profit after tax fell 12% to USD 11.8 billion or USD 7.21 per share, about AUD 10.92, driven by lower aluminum prices and higher unit cash costs. Adjusted EBITDA of USD 23.9 billion was 9% below 2022 but broadly in line with our estimate. The Pilbara iron ore business had a solid year. Average iron ore prices of USD 108 per metric ton were modestly higher than in 2022. Along with 4% higher volumes of about 280 million metric tons and modestly lower unit cash costs of roughly USD 22 per metric ton, close to our forecast, iron ore EBITDA rose 7%. The iron ore business continues to drive Rio’s earnings, comprising 84% of 2023 EBITDA. While Rio’s free cash flow of USD 7.7 billion fell 15% lower, the balance sheet remains very strong. Net debt of about USD 4.2 billion is minimal, roughly 0.2 times EBITDA. Rio will pay a fully franked final dividend of USD 2.58, about AUD 3.91, in April. Total 2023 dividends of USD 4.35 (AUD 6.59) were down 12% on lower earnings, but the 60% payout ratio is at the top end of Rio’s target.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt and diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The company’s largest customer by far is China, accounting for about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly for iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

No-moat Rio Tinto’s 2023 fourth-quarter sales were in line with our expectations. Its share of sales from its Pilbara iron ore operations, the main driver of earnings, was roughly 280 million metric tons in 2023, 4% above last year. Rio is on track to meet our forecast for 2023 Pilbara unit cash costs of around USD 22 per metric ton, modestly higher than 2022, when it reports its 2023 earnings in February. We forecast similar Pilbara iron ore sales and unit cash costs in 2024. Rio’s Pilbara operations account for roughly 80% of our forecast 2023 EBITDA of about USD 24.7 billion. Assuming a 55% payout ratio, we forecast 2023 dividends of USD 4.30, or around AUD 6.40, per share, representing a fully franked yield of about 5% at the current share price.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt and diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The company’s largest customer by far is China, accounting for about 54% of sales in 2022. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly for iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

No-moat Rio Tinto’s 2023 third-quarter sales met our expectations. Its share of shipments from its Pilbara iron ore operations, the main driver of earnings, was roughly 72 million metric tons, 3% above the same quarter of 2022 and 8% higher than the previous quarter. Rio is on track to meet our forecast for 2023 Pilbara iron ore sales of roughly 280 million metric tons (its share), around 4% above last year. We reiterate our forecast for 2023 unit cash costs in the Pilbara of roughly USD 22 per metric ton, modestly up on 2022.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt and diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The company’s largest customer by far is China, accounting for about 54% of sales in 2022. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly for iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminium (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt and diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The company’s largest customer by far is China, accounting for about 60% of sales in 2021. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly for iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

Rio Tinto’s adjusted net profit after tax, or NPAT, fell 34% to USD 5.7 billion or USD 3.53 per share, driven by lower commodity prices and higher unit cash costs. Adjusted EBITDA of USD 11.7 billion was 25% below the first half of 2022 and about 4% below our estimate. Lower realised prices accounted for USD 3.3 billion of the difference, with higher costs also contributing. However, cost headwinds are starting to moderate as inflation reduces.

Strong iron ore sales drove a solid first-quarter fiscal 2023 for no-moat Rio Tinto. The company’s share of Pilbara iron ore shipments, the key driver of its earnings, was about 70 million metric tons, 16% higher than first-quarter fiscal 2022. The increase was driven by 12% higher production in the quarter along with the company drawing down inventory. First-quarter sales are broadly tracking our unchanged 2023 forecast. However, given the usual seasonality in iron ore production and also that Rio’s new 100%-owned Gudai-Darri mine is on track to ramp up to full production of about 43 million metric tons during 2023, our forecast for Pilbara iron ore sales of about 280 million metric tons (Rio’s share) in 2023 could be on the low side if current production levels are maintained. However, it is still early in 2023, so we maintain our forecast for now.

No-moat Rio Tinto’s 2022 third-quarter production was broadly similar to the previous corresponding period, or pcp, across its various commodities, though generally up on the second quarter of 2022. Iron ore production from its mines in the Pilbara, which represent much of Rio’s earnings, was around 84 million tonnes (on a 100% basis), about 4% less than our estimate, but modestly higher than the pcp as Rio’s new Gudai-Darri and Robe Valley mines ramp up. We slightly reduce our forecast for 2022 iron ore production to about 320 million tonnes (100% basis), down from 325 million, but with the tailwind of a weaker AUD/USD rate, we think our forecast for unit cash costs of around USD 20 per tonne for 2022 remains reasonable. However, due to production issues at its Kennecott refinery and smelter in the United States as it awaits refurbishment in 2023, we also reduce our forecast copper production in 2022 to about 710,000 tonnes, down from around 730,000 tonnes. Lower production will likely increase cash unit costs, but we have already assumed higher costs in Rio’s copper business due to inflation.

No-moat Rio Tinto has entered into an updated joint venture, or JV, with China Baowu Steel, or Baowu, to develop the Western Range project in the Pilbara, Western Australia. The JV is subject to shareholder and regulatory approval. Rio owns 54% of its existing JV with Baowu, which began in 2002 and envisaged the development of both the Eastern Range and nearby Western Range deposits. However, the total production cap of 200 million tonnes, or Mt, under the existing JV is now expected to be reached in 2027 solely using production from the existing Eastern Range mine. The two companies want to update their existing relationship to develop the Western Range deposit. If developed, the mine will cost around USD 2 billion on a 100% basis with total output of about 275Mt over more than a decade. Production is likely to begin in 2025 or 2026 and reach full capacity of about 25Mt per year later this decade. Similar to their existing arrangement, Baowu has also entered into a long-term sales agreement covering the equivalent of its 46% share of production from the Western Range. Baowu will purchase up to about 125Mt of Rio’s iron ore production at market prices.

We transfer coverage of Rio Tinto to a new analyst with an unchanged no-moat rating and fair value estimate of AUD 101 per share. This reflects our recently updated forecasts for iron ore, copper, and aluminium prices, which were incorporated into the prior fair value estimate.