Ord Minnett Research Recommendation: Rio Tinto (ASX: RIO)
Rio Tinto reported first-half CY21 underlying earnings of US$12.2bn, more than the same period last year and in line with Ord Minnett’s forecast. The company ended the half with net cash of US$3.1bn, above consensus estimates of US$2.3bn. An interim dividend of US$3.76 per share was declared, up from US$1.55 a year ago, along with a special dividend of US$1.85 per share. Combined, the US$5.61 dividend equates to a payout ratio of 75% of underlying earnings.
Management has approved a US$2.4bn investment in its Jadar lithium-borates project in Serbia, with first saleable production expected in CY26. The company sees lithium demand growing 25–35% per annum over the next 10 years, as electric vehicle and battery storage use increases, and expects the operation to make it the largest supplier of lithium in Europe for at least 15 years.
There were no material changes to production or capital expenditure guidance, although ongoing risk to CY21 guidance was noted due to the impact from COVID-19, the weather, cultural heritage issues, tie-ins and labour shortages. Replacement capacity of 90Mt and bringing on the 43Mtpa Gudai-Darri mine are likely to hamper sales. We have retained our 318Mt forecast for CY21, which is below guidance, and lowered our CY22 forecast to 338Mt from 348Mt.
We have reduced our EPS forecasts by 5% in CY21 and 7% in CY22 due to our more conservative production and cost assumptions, leading us to trim our target price to $161.00 from $165.00. We continue to see Rio Tinto as a turnaround story, with iron ore unlikely to reach its potential until the 143Mtpa tie-ins are completed and fully ramped up, which could take a few years. In the longer term, however, we expect the current wave of investment to lead to a better and more sustainable performance. We maintain our Buy recommendation.
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.