Rio Tinto’s first-quarter CY17 production was softer than Ord Minnett’s forecasts, although the key drivers were primarily events out of the company’s control.
Iron ore output was a 4% miss, with the Pilbara operation running at a rate of 311 million tonnes per annum (Mtpa) as it was constrained by flooding.
Mined copper was well under OMLe, with the Escondida strike in Chile impacting more than we estimated, and sovereign issues leading to zero share from Grasberg in Indonesia.
Production guidance was maintained in iron ore at 330–340Mt, but mined copper guidance was cut 5–12%.
The key highlight was titanium dioxide, which beat our forecasts, with the company citing improved market demand. Meanwhile, metallurgical coal fell short of forecasts, largely due to the Kestrel longwall change.
Overall, we maintain our Accumulate recommendation on Rio Tinto. The stocks screens attractive on valuation, sporting a price to net present value ratio of 0.79 and a CY18E enterprise value to operating earnings multiple of 4.0. Meanwhile, the balance sheet is in the best shape among the majors, with gearing still falling to under 10% at an iron ore price of US$50 a tonne.