Rio Tinto recently released its June-quarter production report and we make the following observations:
- Following a period of destocking, Pilbara iron ore shipments rose 10% on a year ago to 88.5Mt, or a rate of 355Mtpa, 5% above our estimate. This is close to port nameplate capacity of 360Mtpa and just shy of record December-quarter 2017 levels.
- Copper volumes were also strong due to a spike in grade at the Bingham Canyon Mine to 0.63% copper from 0.43% a year ago.
- In the aluminium division, bauxite was 4% higher than our estimate, while aluminium was broadly in line despite labour issues in Canada and power outages in France.
- Ahead of its 1 August financial result, the company flagged rising unit costs due to labour disruptions and rising raw material costs, particularly in aluminium.
The strong performance has put Rio Tinto in a strong position to reach the upper end of its 330–340Mt iron ore guidance, with our forecast already at 340Mt. The first-half achieved price of US$57.9/t was about US$1/t lower than our forecast, likely due to higher Robe River product discounts.
We have adjusted our cost forecasts a touch higher to US$14/t in first-half CY18 from US$13.8/t in the same period last year due to the increase in oil prices and our higher inflation assumption across our operational forecasts. However, our 62% operating earnings margin is broadly flat on 2017 levels.
Rio Tinto’s share price has retreated from recent highs, which we view as a buying opportunity. The stock is trading on attractive valuation metrics and will be net cash in CY19, with the key divisions performing well, leading us to maintain our Accumulate recommendation. However, we lower our NPV-based target price slightly to $96.00 from $98.00 based on our net present value estimate.