ii view: Rio Tinto lowers iron ore hopes as economies slow

This FTSE 100 miner's shares have fallen by around a fifth over the last six months. We assess prospects. 

Third-quarter production update to 30 September

• Full year iron ore shipments expected to be at the low end of its 320 to 335 million tonne estimate

Chief executive Jakob Stausholm said:

“Delivering the full potential of our assets remains a priority: production improved versus the prior quarter across most of our sites, particularly where we have implemented the Rio Tinto Safe Production System. 

"We continue to deliver our strategy with decarbonisation at its centre. We are taking action to transform our culture and rebuild trust, implementing the recommendations of the Everyday Respect report and publishing our second progress report on our Communities and Social Performance practices, which includes increased feedback from Traditional Owner groups, with responses from seven groups compared to four in 2021."

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ii round-up:

Mining mammoth Rio Tinto (LSE:RIO) today guided its full-year iron ore sales expectations towards the low end of its previous forecast because of slowing global economic growth. 

Annual iron ore shipments, its core commodity accounting for almost two-thirds of total adjusted profit, are expected to come in at the lower end of its previous 320 to 335 million tonnes estimate. Third-quarter shipments to the end of September fell 1% year-over-year to 82.9 million tonnes. 

Rio shares fell by around 2% in UK trading having come into this latest announcement down by more than a fifth over the last six months. Shares for rival BHP Group Ltd (LSE:BHP) are down by a similar amount, while the FTSE All World index has fallen by just under a fifth as economic growth slows due to interest rate increases aimed at taming runaway inflation. 

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The price of iron ore is down by around two-fifths over the last six months, with the price of copper, which accounts for around a tenth of Rio's profit, down by more than a quarter. Economic growth for the world’s second biggest economy China, and a major customer for Rio, grew by just 0.4% during the second quarter, below forecasts for around 1%.   

Rio’s iron ore production rose 7% from the previous quarter and by 1% year-over-year to 84.3 million tonnes. The FTSE 100 miner also announced progress at its Western Australia Rhodes Ridge iron ore project, with plans to modernise the site in conjunction with its 50/50 partner Wright Prospecting. 

Morgan Stanley summarised the update as meeting its expectations with the broker retaining its ‘equal weight’ stance on the shares. 

ii view:

Tracing its history back to 1873, diversified miner Rio Tinto today employs over 45,000 people worldwide. It has strong presences on the ground in both Australia and North America, although it is located across more than 30 countries. Other group mined commodities include aluminium, generating around a fifth of total adjusted profits. China is its biggest customer, accounting for just over 55% of sales, followed by the USA at just over 12% and Japan at close to 8%. 

The current chief executive took over following the prior heads resignation after the miner 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 Aboriginal people, along with enhancing policies in relation to race, sex discrimination and climate change goals. 

For investors, commodity demand is tied to economic growth, making the industry cyclical in nature. A highly uncertain economic outlook including rising interest rates and a consumer cost-of-living crisis cannot be ignored. China remains its key customer, with relations between the West and China becoming more strained, while a Chinese property slowdown and ongoing pandemic lockdowns also overshadow the business. Factors outside of Rio’s control such as the weather can impact progress, with its ESG policy also under the spotlight.  

More favourably, plans to improve efficiency continue to be pushed, with the miner recently entering a long-term autonomous haulage R&D collaboration agreement with truck maker Scania. Moves to refocus its commodity products towards climate change or decarbonising materials have been made, while efforts to improve its ESG policy are being pursued. 

On balance, and while some caution appears sensible, a forecast dividend yield of around 10% is reason for income investors to remain interested.  

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:

Strong hold