- Q4 production has some misses but key iron ore business stays on track
- New mine Gudai-Darri to hit production capacity this year
Rio Tinto’s (RIO) strategic moves over the past few years are starting to pay off, with long-term decision-making and some canny acquisitions providing a handy growth path for the miner.
Production guidance for 2023, released this week alongside its December quarter output figures, shows increases for iron ore, copper and alumina/bauxite. Alongside the large-scale growth, the miner is also moving quickly to build a lithium test plant at the Rincon mine in Argentina, which it bought last year.
The company flagged supply chain risks alongside China junking its Covid-19 rules. “The end to Covid controls in December and the subsequent wave of Covid cases bring high volatility in the coming quarter, with increased short-term risks of supply chain disruptions and labour shortages,” the miner said, before adding that a full recovery in steel demand “hinges on the country’s ability to control the Covid outbreak”.
Full-year iron ore production was 322mn tonnes, flat on 2021, at an average realised price of $98 (£80) a tonne. The December quarter was exceptional, with the 89.5mn tonnes representing annualised production of 349mn tonnes. Guidance for this year is 320mn to 335mn tonnes. The company held onto 2022 cost guidance, and specific numbers will be published next month.
The other key metal, copper, had guidance hiked for 2023 to 650,000 - 710,000 tonnes after Rio bought out the minority investors in the Oyu Tolgoi holding company Turquoise Hill Resources (CA:TRQ) for $3bn. Production last year was 521,000 tonnes.
RBC analyst Tyler Broda said the miner’s long-term planning was bearing fruit.
“The company's portfolio has some compelling options and unlike the other majors offers growing lithium exposure,” he said. “Rio Tinto continues to move through a transitory phase as it rebuilds operating momentum in the Pilbara but before new growth really starts to kick-in.”
Broda warned that lower iron ore prices could be a drag on 2023 free cash flow. Forecasts vary on the steel ingredient’s price levels this year. Broker Liberum sees an average price of $86 a tonne, while investment bank Bernstein is more bullish at $115 a tonne.
One new factor is China’s increasingly interventionist stance on the iron ore spot market. Bloomberg reported this week that Beijing had called in traders after the spot price climbed back over $120 a tonne. Additionally, the country’s National Development and Reform Commission has said twice in recent weeks the price moves were not reasonable. “Given the fundamentals of iron ore market supply and demand are generally stable, the rapid price rises are obviously speculative,” the commission said on 6 January.
While these Chinese moves are obviously a risk to Rio Tinto, as well as BHP (BHP) and Vale (BR:VALE3), we still see positives in the sector given the balance sheet strength following years of strong prices. The dividend has already come down from the record levels seen in the past 18 months, but should remain consistent even through this transitory phase. Hold.
Last IC View: Hold, 4,659p, 27 Jul 2022
