Turn Up The Volume

Rio Tinto recently held its 2017 investor seminar with a focus on iron ore and aluminium. Key points we noted were: 1) costs are under pressure, with productivity improvements required to offset inflation; 2) capital expenditure is to rise from US$4.5bn in 2017 to US$6bn in 2019/20; and 3) 2018 production guidance was broadly in line with our estimate, with rail still the bottleneck limiting iron ore volumes. Rio Tinto is targeting US$1.5bn pa of productivity gains post 2021.


  • Iron ore volume and cost outlook – 2018 Pilbara shipment guidance of 330–340Mt appears conservative, in our view, on the basis the port and mines could both handle 360Mtpa. Rail remains a bottleneck at 330Mtpa currently, although as its AutoHaul driverless train program ramps up in late 2018 and maintenance is completed, the exit rate should be higher. Management did not commit to reducing 2018 costs due to higher maintenance, haul distances rising 10%, and flat strip ratios. There was no change to guidance for the Koodaideri project of US$2.2bn capital expenditure, 40Mtpa production and first ore in 2021.
  • Aluminium guidance – Similar to iron ore, Rio Tinto flagged cost pressures in the aluminium division due to rising coke, pitch and caustic prices. 2018 aluminium production guidance of 3.4–3.7Mt was in line with our 3.55Mt forecast, with 1% annual creep targeted. There are no advanced brownfield project options, but the company noted the incentive price for western greenfield projects was US$2,500/t.

We have trimmed our 2018 iron ore production forecast and increased our medium-term capital expenditure estimate, although we are still below guidance pending further approvals such as Zulti South. We are positive on Rio Tinto, but the stock appears fair value with limited near-term catalysts. We have lowered our target price to $75.00 from $77.00 and maintain our Hold recommendation. 

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