Rio Tinto posted what Ord Minnett viewed as a mixed March-quarter production report, with iron ore matching our expectations but copper and titanium dioxide falling short.
Iron ore shipments declined 12% quarter-on-quarter (QoQ), with the impact of the wet season exacerbated by labour shortages and maintenance, although CY21 guidance was retained. Pilbara iron ore shipments of 77.8Mt matched Bloomberg port data. However, production of 76.4Mt (a run rate of 310Mtpa) was lower again, affected by the usual cyclone season, fixed-plant reliability and labour shortages. The Gudai-Darri (43Mtpa) project, located north-west of Newman in Western Australia, remains on track with ramp-up expected in early CY22.
Copper production fell 9% QoQ and missed our forecast following lower grades and throughout at Escondida in Chile. COVID-19 disruptions also hit the Oyu Tolgoi project in Mongolia and threaten to delay the development timeline of the underground expansion. On a positive note, Kennecott Utah Copper should see an increase in grades as it moves to the south wall.
Aluminium and bauxite performed broadly as expected, while titanium dioxide output missed our forecast by 7%.
CY21 guidance was retained for all divisions, including iron ore at 325–340Mt – we estimate 333Mt. Management flagged risk to around 90Mt, however, due to replacement mine capacities.
We forecast a US$6.5bn net cash position for Rio Tinto by the year end, suggesting potential upside to capital returns from our 80% EPS payout estimate.
Despite the soft start to CY21, we note Rio Tinto is trading at a 25% discount to our net present value measure, and offers 13% and 10% dividend yields in CY21 and CY22, respectively. In our view, cheap valuation metrics, strong returns and a positive global growth backdrop make Rio Tinto one of the most compelling investment propositions in the sector. We reiterate our Buy recommendation, although we have trimmed our target price to $161.00 from $163.00.
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.
Tags
RIO, Rio Tinto
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