Flat in the Pilbara

Rio Tinto (RIO) recently released its June quarter 2017 production report, which Ord Minnett considered to be a relatively weak quarterly result with Pilbara iron ore shipments flat on the previous quarter and the company flagging further rail maintenance effects in the second half of 2017.


Pilbara shipments ran at a rate of 311Mtpa, flat on the previous quarter and 7% below our estimate. The top end of management’s previous 330-340Mt guidance was removed, with the revised 330Mt for 2017 (we estimate 327Mt) implying Rio Tinto needs to run at a rate higher than 340Mtpa in 2H17.


Mined copper guidance wasn’t revised from 525,000t, although our estimate is 9% lower at 476,000t given the delay in ramping up three concentrators at Escondida – yet to be quantified by its joint venture partner, BHP Billiton (BHP, Hold). Coking coal production guidance was lowered from 7.8–8.4Mt to around 7.2–7.8Mt as a result of Cyclone Debbie.


Key positives in the quarter were beats in bauxite and coal production, although we have cut our 2017 EPS estimate by 2% after incorporating our model changes, including $180 million of early bond redemption charges.


Rio Tinto reported an iron ore price of US$62.40 per wet metric tonne (wmt) free on board (FOB) for the half year, in line with our forecast. While not disclosed separately, we assume the strong lump premiums have offset a slightly wider than normal Yandi discount. We estimate first-half CY17 unit costs at US$13.30/t, up 1% half-on-half (HoH).


Rio Tinto continues to screen well across its peer group based on valuation, free cash flow, production growth, balance sheet and capital management potential. We also note recent China data and iron ore prices have surprised on the upside. We maintain our Accumulate recommendation and $72.00 target price.

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