Morningstar | Rio Tinto’s 2Q Broadly as Expected; FVE Maintained
We retain our AUD 48 per share fair value estimate for no-moat Rio Tinto. Second-quarter 2018 production was broadly as expected, and output from the company’s core Western Australian iron ore operations was strong. Rio Tinto is on track to meet the top of its guidance range to ship 330 million-340 million tonnes of iron ore, and we’ve lifted our 2018 volume forecast marginally as a result. Copper production was also buoyant, thanks to better grades at Kennecott and expanded capacity at Escondida. Elsewhere, there were pockets of weakness with output of titanium dioxide slag in South Africa and Canada, as well as iron ore from Canada, affected by labour disputes and a fatality.Rio Tinto again mentioned cost inflation, particularly in aluminium. Conditions for the past couple of years have been favourable for miners, with prices rising while operating costs, such as labour, energy and other inputs, and capital costs, such as machinery, remained relatively contained. The link between commodity prices and operating costs for miners is apparent in historical data, but lagged. We’ve awaited evidence of rising costs to flow through to margins for miners and suspect the June 2018 half will see some of the benefit of rising prices lost to higher costs. If correct, we may see the market temper its earnings and cash flow forecasts. Future earnings enthusiasm may also be curbed by recent moderate declines in prices for iron ore and base metals.
Elsewhere, we’ve factored the sale of Grasberg and some of the company’s aluminium assets into our cash flow and earnings forecasts. The sales are not material to our fair value estimate or future earnings. However, the additional cash marginally reduces the financial leverage in Rio Tinto’s business and the sensitivity of our fair value estimate to changes in commodity prices. We still think our high fair value uncertainty rating is appropriate, reflecting the cyclical nature of commodity prices and the firm's operating leverage.
Rio Tinto is a mining group based in the United Kingdom and Australia. Co. is engaged in the business of finding, mining and processing mineral resources. Co.'s major products are iron ore, aluminium, copper, diamonds, coal, uranium, gold and industrial minerals (borax, titanium dioxide and salt). Co.'s activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and Africa. Co.'s operations comprise four principal product groups - Iron Ore, Aluminium, Copper and Diamonds, and Energy & Minerals.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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