ii view: Rio Tinto aided by Chinese recovery

Government stimulus is helping this diversified miner. Buy, sell or hold?

Fourth-quarter production update

• Iron ore production up 3%
• Copper output down 4%

Chief executive Jakob Stausholm said:

"We have delivered a strong safety and operational performance in the face of the significant global challenges of Covid-19. Our 2020 performance reflects the resilience of the business, and the commitment and flexibility of our employees, customers, communities and host governments.

"We are working to restore trust with the Puutu Kunti Kurrama and Pinikura people. More broadly, we are determined to improve Rio Tinto's approach to stakeholder engagement globally by embedding a more inclusive approach that strengthens our overall thinking, decision-making and performance. However, I do not underestimate the time and effort it will take, genuinely working together with our partners, in order for Rio Tinto to drive the changes necessary to help restore trust and rebuild our reputation.

"Safe and well-run operations, together with world-class assets and a strong balance sheet, leave Rio Tinto well placed to generate superior returns for shareholders, invest in sustaining and growing our portfolio, while continuing to pay taxes and royalties in our host communities and make a broader contribution to society, including employment and procurement."

ii round-up:

Diversified miner Rio Tinto (LSE:RIO) reported a 3% quarterly production increase for its key iron ore product, aided by Chinese government stimulus and a return to pre-Covid health for China’s industrial sector.

However, 2021 guidance for iron shipments of between 325 and 340 metric tons per workday fell marginally below analysts’ forecasts, which could see estimates for adjusted full-year earnings reduced by around 1%.

Rio shares drifted marginally lower in UK afternoon trading, but that still leaves them up by more than a quarter over the last year. Shares for sector giant BHP (LSE:BHP) are up nearer to 15% over the same period, while shares of Anglo American (LSE:AAL) have climb by almost a fifth. 

Iron ore prices rose significantly in the second half of 2020, and buying from China remained robust despite some localised impacts from coronavirus in some regions. Demand in Japan, Korea, Taiwan and Europe was said by Rio management to be “recovering,” amplified by restocking. 

The production report is the first under new chief executive Jakob Stausholm. Former head Jean-Sébastien Jacques stepped down in late 2020 after Rio earlier in the year destroyed a sacred old cave complex in Western Australia. It is now working with the Puutu Kunti Kurrama and Pinikura people to rebuild its relationship. 

Rio previously committed to invest $50 million to increase employment opportunities for Indigenous Australians in its business and enhance Indigenous leadership at its Australian operations.

Copper production rose by 2% from the prior third-quarter period, although it fell by 4% compared to the final quarter of 2019. Rio expects global fiscal stimulus, particularly in the electrification and renewables sectors, to be copper-intensive and supportive of the outlook. 

Rio has interests in the Oyu Tolgoi development project in Mongolia. By 2030, it is expected to be the fourth-largest copper mine in the world. 

ii view:

Rio Tinto has a history dating back more than 140 years. Today it has a workforce of over 45,000 people spread across more than 30 countries. It has strong presences on the ground in both Australia and North America. A diverse portfolio of mined commodities compares to the more focused product list sold by rival Antofagasta for example. 

Events in Australia over 2020 and its now required rebuild of trust with Indigenous Australians served to highlight Environmental, Social and Governance (ESG) concerns. These issues can be weighed against its climate change strategy, including a target to reduce absolute emissions by 15% come 2030 from 2018 levels.

For investors, the ongoing payment of a dividend during the pandemic and an estimated one-year dividend yield of over 5%, not guaranteed, is difficult to overlook. Exposure to expected long-term Chinese economic growth also offers attractive. However, a near doubling in the share price since late March pandemic lows does inject some reason for caution, as does its proximity to the current consensus analyst target price of £57.46 per share.

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