Interactive Investor

ii view: Rio Tinto cuts Canadian iron ore output forecast

Shares in this FTSE 100 mining mammoth are down around a tenth so far this year but still offer an attractive dividend yield. We assess prospects.

17th October 2023 11:34

by Keith Bowman from interactive investor

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Third-quarter production update to 30 September

  • Australian Pilbara iron ore shipment of 83.9 million tonnes, up 6% from Q2

Guidance:

  • Now expects Canadian full-year iron ore production of between 9.3 and 9.8 million tonnes, down from  a previous estimate of 10 million to 11 million tonnes
  • Continues to expect full-year Australian Pilbara iron ore shipments at the upper end of its existing 320 to 335 million tonne range 

Chief Executive Jakob Stausholm said:

“We are making strong progress towards building the Rio Tinto of the future, striking a balance between disciplined performance in evolving market conditions, investing to generate valuable long-term growth and delivering attractive shareholder returns.” 

ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today cut its expected annual iron ore pellet and concentrate production forecast given disruption to its Canadian operations, but left all other production targets unchanged. 

Canadian iron ore production is now expected to come in at between 9.3 to 9.8 million tonnes, down from a previous target of up to 11 million tonnes and due to a combination of extended plant downtime, conveyor belt failures and earlier year wildfires. 

Shares in the FTSE 100 miner fell around 1% in UK trading having come into this latest news down by around a tenth year-to-date. That’s similar to fellow diversified miner BHP Group Ltd (LSE:BHP) and in contrast to a marginal gain for the wider FTSE 100 index during 2023. Rio shares have been volatile mostly between £45 and £60 for the past three years.

Helped by signs of Chinese economic stability, according to Rio Tinto management, iron ore shipments from its major Australian Pilbara operations rose 6% from the previous quarter to 83.9 million tonnes, equating to a 1% increase from Q3 2022.

Rio summarised China’s economic recovery as ‘uneven’, with the country's property market prompting further policy easing. The miner continues to forecast full-year iron ore shipments at the upper end of its existing 320 to 335 million tonne range. 

Broker Morgan Stanley expects no real changes to profit estimates following the update, reiterating its ‘overweight stance on the shares and flagging Rio as an ongoing ‘top pick’. 

ii view:

Tracing its history back to 1873, Rio is today works in 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. Geographically, China accounts for its biggest slug of sales at just over a half, followed by the USA at around 16% and Japan 7%. 

For investors, commodity demand is tied to economic growth, making mining cyclical in nature, property market challenges continue to weigh in its biggest marketplace China, while interest rates in the US will likely stay higher for longer. Costs generally for businesses also remain elevated, the West’s relationship with China is now more strained given its close tiers with Russia, while shareholder returns were previously cut given high uncertainty about the outlook. 

On the upside, some economic stability in its biggest market China has been highlighted. A diversity of commodities is mined, more so than at rivals such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES), while plans to improve efficiency including using automated vehicles warrant consideration. There's a focus on decarbonising materials such as its lithium project in Argentina, while efforts to improve its Environmental, Social and Governance (ESG) policy are ongoing. 

On balance, and while concerns about economic growth persist, a forecast dividend yield of over 6% should keep income focused investors happy. 

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:

Strong hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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