Interactive Investor

ii view: iron ore shines at miner Rio Tinto but copper's dull

20th April 2023 15:52

by Keith Bowman from interactive investor

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Exposure to a recovering Chinese economy following the pandemic and forecast dividend yield of over 6%. We assess prospects. 

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First-quarter production update to 31 March

  • Iron ore shipment up 16% year-over-year to 82.5 million tonnes

Guidance:

  • Continues to expected full year iron ore shipments of 320-335 million tonnes
  • Cut full-year mined copper shipment estimate by 10% to 590-640 million tonnes

Chief Executive Jakob Stausholm said:

“Through the ongoing deployment of our Safe Production System we expect to see a sustainable lift in operating performance across our global portfolio over time, in line with improvements already achieved. We remain focused on disciplined growth in materials the world needs for the energy transition.”

ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today detailed record first-quarter iron ore shipments as China’s economy continued to recover from the pandemic, but cut its full-year copper production estimate following operational issues. 

Iron ore shipments rose 16% year-over-year to 82.5 million tonnes, leaving it on target to ship 320-335 million tonnes during the full year 2023. However, a conveyor outage at its US Kennecott mine, alongside geotechnical challenges for its Escondida open pit Chilean operation, fed into a 10% cut to its annual copper production forecast.

Shares fell just over 1% in afternoon UK trading having come into this latest news down around 4% year-to-date. That’s similar to fellow Australian iron ore and diversified miner BHP Group Ltd (LSE:BHP) and in contrast to a near 6% gain for the wider FTSE 100 index. 

Located across more than 30 countries and with strong presences on the ground in both Australia and North America, Rio generates more than half its sales from China. 

Operational challenges at its copper operation resulted in a 5% fall in production from the previous quarter to 145 million tonnes, despite it achieving its first sustainable production from its underground Mongolian mine at Oyu Tolgoi. 

In March, Rio marked World Water Day by becoming the first major mining company to publish site-by-site water usage data. Its staff injury frequency rate improved to 0.32 from 0.34 in the same quarter last year.  

First-half results are scheduled for 26 July. 

ii view:

Tracing its history back to 1873, diversified miner Rio Tinto today employs over 45,000 people worldwide. Its core commodities are iron ore generating almost 60% of sales, aluminium at around 25% and copper at 6%. Below China, the US is its second biggest customer accounting for around 16% of sales, followed by Japan at 7%. 

For investors, commodity demand is tied to economic growth, making the mining industry cyclical in nature. Economic outlook uncertainty remains high, with potential for further interest rate rises, the West’s relationship with Rio’s biggest customer China remains strained, while shareholder returns were previously cut given the cocktail of outlook uncertainties. 

On the upside, a diversity of commodities is mined, in contrast to more focused rivals such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES). Plans to improve efficiency, including using automated vehicles, warrants consideration, there's a focus on decarbonising materials such as its lithium project in Argentina, while improvements to its Environmental, Social and Governance (ESG) policy are being pursued. 

While a good dose of caution remains sensible and investors will notice the big drop in the expected dividend for this year, the forecast yield of over 6% will likely keep income investors onboard and make Rio a core holding in many diversified portfolios.

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:

Hold

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