ii view: mining star Rio Tinto suffers tough second quarter

Shares for this iron ore producer have almost doubled since pandemic lows. We assess prospects. 

Second-quarter production update

• Iron ore production down 9% versus Q2 2020
• Copper production down 13% versus Q2 2020

Chief executive Jakob Stausholm said:

“The global economy, in particular China, recovered strongly and we are intensely focused on servicing our customers with as much product as we can. However, we faced some challenges in the first half notably at our Pilbara operations.”

ii round-up:

Diversified miner Rio Tinto (LSE:RIO) guided towards the lower end of its full-year production estimate for its key commodity iron ore, as heavy rainfall and increased Covid related challenges hindered second-quarter production. 

Iron ore shipments for 2021, used in the making of steel, are expected to come in at the lower end of its previous 325 million tonnes (mt) to 340 mt estimate. Second-quarter iron ore production fell by 9% to 75.9 mt compared to the second quarter of 2020.

Management also raised its unit cost estimate for the year to $18.0-$18.5 per tonne, up from a previous forecast of between $16.7-17.7 per tonne.

Rio shares drifted marginally lower in UK trading, having almost doubled since pandemic market lows back in March 2020. Shares for rival and the largest miner listed on the UK stock market BHP (LSE:BHP) are up by a similar amount. Copper miner Antofagasta (LSE:ANTO) is up around 120%. 

Both Rio's copper and bauxite production also fell by 13% and 6% year-over-year, with production guidance for each also now expected to materialise at the lower end of its annual forecasts. 

Broker Morgan Stanley estimated that the report as a whole would result in first-half adjusted earnings (EBITDA) coming in 5% below its previous forecast. 

Increased pandemic-related restrictions hindered travel during the quarter, limiting Rio's ability to hire extra staff, particularly in Western Australia and Mongolia, needed to deliver operational improvements and maintenance. 

First-half results are scheduled for 28 July.

ii view:

The 1995 merger of RTZ and CRA form the foundations of today’s company. Its largest product by sales is iron ore, followed by aluminium and copper. It has strong presences on the ground in both Australia and North America, although its workforce of over 45,000 staff is located across more than 30 countries. China is by far its biggest market generating nearly 60% of 2020 sales. 

The current chief executive took over following the previous head's resignation, after the miner previously 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 Puutu Kunti Kurrama and Pinikura people. A climate change strategy and target to reduce absolute company emissions also feeds into today’s ESG policies. 

For investors, Rio’s focus on shareholder returns and its payment of special dividends along with ordinary dividends over recent years offers a key attraction. An historic dividend yield of over 6.5%, when including the last special dividend - not guaranteed going forward - is difficult to ignore in the current ultra-low interest rate era. Exposure to expected long term Chinese economic growth should also not be forgotten. But the weather has again shown its ability to impact, and operational challenges from the pandemic persist. The West’s relationship with China is also growing increasingly more difficult. For now, and given its focus on shareholder returns, investors will likely be tempted to hold on through what is referred to as the 'commodities supercycle'.

• Commodities ‘supercyle’: why you should be bullish on mining stocks

Positive

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

Negative

• Uncertain global economic outlook
• Subject to matters outside of management’s control such as the weather

The average rating of stock market analysts:

Strong hold