Interactive Investor

ii view: investors like Rio Tinto's optimism about 2024

Overshadowed by concerns about China but offering an attractive dividend yield. We assess prospects for this major FTSE 100 miner.

16th January 2024 11:25

Keith Bowman from interactive investor

Fourth-quarter and full-year production update to 31 December

  • Australian Pilbara iron ore shipment of 86.3 million tonnes, up 3% from Q3
  • Full-year 2023 Australian Pilbara iron ore shipment of 331.8 million tonnes, up 3% from 2022

Guidance:

  • Expects full-year 2024 Australian Pilbara iron ore shipments of between 323-and 338 million tonnes

Chief Executive Jakob Stausholm said:

“Rio Tinto Chief Executive Jakob Stausholm said: "We were fatality free for the fifth consecutive year at our managed operations but we remain vigilant and continue to learn from safety incidents.

"There is good demand for the materials we produce, and our purpose and long-term strategy make more sense than ever. The work we are doing today is creating a stronger Rio Tinto for years to come, as we invest in profitable growth while continuing to deliver attractive shareholder returns."

ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today detailed quarterly production broadly matching City forecasts, with demand for its core iron ore product potentially rising during the year-ahead. 

Full-year 2023 shipments for its biggest sales generator Australian Pilbara iron ore rose 3% from 2022 to 331.8 million tonnes, with management forecasting 2024 demand of 323-338 million tonnes, a near 2% increase at the upper end of the range. 

Shares in the FTSE 100 miner rose marginally in UK trading having come into this latest news down by close to 5% over the last month. That’s similar to fellow miners BHP Group Ltd (LSE:BHP) and Glencore (LSE:GLEN) and in line with a 5% fall for Hong Kong's Hang Seng index. China accounts for just over half of all Rio Tinto sales, followed by the US at close to a fifth. 

Fourth-quarter iron ore production rose 5% from the previous quarter to 87.5 million tonnes, aided by the ramp up of output at its Australian Gudai-Darri mine. 

Annual production of aluminium climbed 9% to 3,272 kilo tonnes (kt), with mined copper output improving 2% to 620 kt. 

Rio management again flagged a weak Chinese property market, but also pointed to some commodity price support during the final quarter of 2023, helped by increased Chinese policy measures, lower global recession fears and a broad slowdown in inflation.

Broker Morgan Stanley estimates full-year 2023 adjusted profit (EBITBA) will rise around 1% given slightly better commodity price realisations, and reiterates its ‘overweight stance on the shares post the update, flagging Rio as a ‘top pick’. 

ii view:

Tracing its history back to 1873, Rio today has operations located across more than 30 countries with strong presences on the ground in both Australia and North America. Australian Pilbara iron ore generates by far its biggest chuck of adjusted profits (EBITDA) at close to four-fifths, with both copper and aluminium each accounting for a further tenth each. It is growing copper output by developing its underground resource at Oyu Tolgoi, Mongolia, with iron ore operations in Guinea, West Africa, also being pushed.  

For investors, concerns about the health of the global economy continue to weight on the commodity sector, while property market challenges in its biggest marketplace China persist. The West’s relationship with China is also more strained now given its closer ties with Russia. Meanwhile, the environmental impact of mining generally warrants consideration, while shareholder returns were previously cut given high economic outlook uncertainty. 

More favourably, hoped-for US interest rate cuts in 2024 could help underpin commodity demand, while China’s government continues to provide economic stimulus. Rio's portfolio includes a diverse range of commodities, more than at rivals such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES). The rollout of its safe production systems is helping to boost output, while efforts to improve its Environmental, Social and Governance (ESG) policy are ongoing. 

For now, and despite ongoing concerns about the economic health of its biggest market China, both a consensus analyst estimate of fair value at over £63 per share and forecast dividend yield of over 6%, offer grounds for longer term investor enthusiasm. 

Positive

  • Selection of different commodities mined
  • Attractive dividend payment (not guaranteed)

Negative

  • Uncertain global economic outlook
  • The weather can impact performance

The average rating of stock market analysts:

Buy

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