ii view: income play Rio Tinto flags tough economic outlook

Shares for this mining giant are down by around a quarter over the last year and following a sharp drop in the past month. Buy, sell, or hold?

Second-quarter production update to 30 June

• Forecast for full year iron ore shipments unchanged
• Forecast for full year aluminium shipments lowered

Chief executive Jakob Stausholm said:

"We strengthened our operational performance at a number of sites, which we will now replicate across the portfolio. We are committed to transforming our culture and building better relationships. In May, we signed a Heads of Agreement with the Puutu Kunti Kurrama and Pinikura (PKKP) people which will guide the co-management of PKKP country where mining takes place.”

ii round-up:

Mining heavyweight Rio Tinto (LSE:RIO) today flagged a weakening economic outlook as it outlined production details for its biggest commodity earner iron ore in line with City estimates. 

The war in Ukraine and pandemic lockdowns in China were highlighted as clouding the economic outlook, with its forecast for expected full-year iron ore production unchanged at between 320 to 335 million tons (Mt), although its forecast for aluminium marginally reduced. 

Rio shares retreated by just over 2% in UK trading having come into this latest update down by around a quarter over the last year. Shares for copper miner Antofagasta (LSE:ANTO) are down by a similar amount over that time, while shares for Glencore (LSE:GLEN), whose product include metals used in battery production, are up by around a quarter. The FTSE All World index is down by just under a fifth over the last year. 

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Aluminium production for Rio is now expected to come in at 3-3.1 Mt, down from a previous 3.1-3.2 Mt, given increased Covid challenges at its Boyne smelter in Queensland, Australia. Aluminium accounts for almost 20% of overall group profits and iron ore around 65%. 

Copper production during the quarter hit 126 kilo tons (Kt), up 9% year-over-year but below City hopes for nearer to 135 Kt. That was down to an extended, although planned, shutdown of its Kennecott Utah US mine. Copper accounts for around a tenth of overall group profit.

Broker Morgan Stanley now expects to reduce its estimated first-half adjusted earnings (EBITDA) forecast by around 5% given production disappointments for both aluminium and copper along with lower realised prices.   

The price of copper has fallen by around a quarter year-to-date as investors have fretted over a potential recession. Economic growth for the world’s second biggest economy China, and a major customer for Rio, grew by just 0.4% during the second quarter, below forecasts of around 1%.   

Rio's first-half results are scheduled for 27 July. 

ii view:

Tracing its history back to 1873, diversified miner Rio Tinto today employs over 45,000 people worldwide. It has strong presences on the ground in both Australia and North America, although it is located across more than 30 countries. Other group mined commodities include both gold and diamonds. China is its biggest customer, generating around 55% of sales, followed by the USA at just over 12% and Japan at close to 8%. 

The current chief executive took charge following the previous head's resignation after the miner destroyed a sacred cave complex in Western Australia, raising Environmental, Social and Governance (ESG) concerns. It is now working to rebuild the trust of the Aboriginal people, along with enhancing policies in relation to race, sex discrimination and climate change goals. 

For investors, commodity demand is tied to economic growth, making the industry cyclical in nature. China remains its key customer, with relations between the West and China becoming more strained in recent years. Factors outside of its control such as the weather can impact, while its ESG policy is now being addressed. 

On the upside, exposure to expected long-term Chinese economic growth remains. Moves to refocus its commodity products towards climate change, or decarbonising materials have been made, while shareholder returns remain a management focus. On balance, and while some caution remains sensible, an estimated future dividend yield of over 10% should keep income investors interested.

Positive

• Exposure to a diverse portfolio of commodities
• Attractive dividend payment (not guaranteed)

Negative

• Uncertain global economic outlook
• Ethical policy concerns

The average rating of stock market analysts:

Strong hold