Price Surprise

Rio Tinto released its December-quarter production report, which was generally in line with our forecast. Copper missed our estimate by 8%, however, due to lower Kennecott Utah Copper (KUC) grades, which fell from 0.64% last quarter to 0.36%. CY20 copper guidance is for lower YoY production of 530–570Mt, versus 577Mt in 2019, with the weak grades persisting before recovering in early 2021.


Iron ore shipments ran at 341Mtpa in 4Q19, which was a relatively solid rate, in our view. The achieved price of US$79/t for 2019 was slightly higher than we expected (but still lower than benchmark) as the discount we incorporated for lower-grade SP10 product sales was too large.


The key surprise in the result was bauxite, which came in 9% above our forecast, with the Amrun operation in Far North Queensland ramping up. Aluminium production was in line with our estimate.


2020 guidance looked conservative, with iron ore rising 0–5% year-on-year, while copper was underwhelming at 530–570Mt versus 577Mt in 2019 with the weak grades persisting before recovering in early 2021.


The Koodaideri operation is on track for first ore in late 2021. 2020 guidance is for 330–343Mt (OMLe 342Mt), which is below port capacity of 360Mt, suggesting Rio Tinto still has a way to go in order to get the rail and mines performing at this level.


Rio Tinto continues to trade at a discount to BHP Group (BHP, Hold) based on an enterprise value to operating earnings (EV/EBITDA) multiple of 5.5x for Rio Tinto versus 6.6x for BHP. We are also attracted to the strong shareholder returns, with dividend yields of 5–6% over the coming year. Positive macro-economic sentiment and a better year for global growth should also be supportive. Due to the strong run in the share price, however, we recently downgraded our recommendation to Accumulate from Buy with an unchanged $112.00 target price.