Rio Tinto released its third-quarter 2019 production report. Iron ore shipments were solid, running at 341Mtpa, 8% ahead of our forecast which was conservative due rail maintenance that affected a small part of the quarter (from 25 September until 6 October). Shipment guidance of 320–330Mt at US$14–15/t was maintained.
Copper production was 13% higher than our forecast, driven by a significant step up in grades at the Kennecott Utah Copper mine and a strong quarter of throughput at Escondida.
The aluminium division was the key disappointment, with downgrades to production guidance for bauxite (to 54Mt from 56–59Mt) and alumina (to 7.7Mt from 8.1–8.4Mt) due to weather and rail maintenance impacts. The division accounts for just 5% of our 2019 earnings before interest and tax estimate, and so we don’t view this as material.
There was no incremental news on the Oyu Tolgoi underground project, with mine redesign works ongoing. The Koodaideri iron ore mine remains on track for late 2021 start-up. Construction at Zulti South hasn’t started yet (previously expected in June) due to community issues, although the company still believes production should start in 2021.
We have reduced our 2019 EPS forecast by 3% after factoring in lower-grade iron ore sales. We maintain our Buy recommendation with a $99.00 target price.
We retain our relative preference for Rio Tinto over BHP Group (BHP, Hold) based on its cheaper valuation, with a price to net present value (P/NPV) multiple of 0.92x for Rio Tinto versus 0.98x for BHP, and a 2020E enterprise value to operating earnings (EV/EBITDA) multiple of 4.8x for Rio Tinto versus 6.3x for BHP.