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Morningstar | Soft 1Q Iron Ore Shipments for Rio Tinto as Expected, AUD 60 FVE Retained

With the startling price action following the iron ore supply disruptions, all eyes were on iron ore for Rio Tinto’s first quarter. Unsurprisingly, 2019 sales guidance was lowered by about 6 million tonnes to between 333 and 343 million tonnes. First-quarter shipments were very soft, down 14% versus a year ago to 69.2 million tonnes. Output was impacted by the cyclone and a fire at Cape Lambert A port. We already factored in first-quarter softness and make no material change to our full-year shipment forecast of 338 million tonnes. An estimated 287 million tonnes is Rio Tinto’s share.

Iron ore unit cost guidance was maintained at USD 13 to 14 per tonne, though lower volumes in 2019 are likely to bring some pressure. Regardless, the key profit driver is the iron ore price and any fluctuations in unit costs are relatively tiny. Unit costs matter more longer term though as Rio Tinto’s competitiveness hinges on unit costs, and given we expect prices to fall. Iron ore shipments should grow modestly and incrementally to 360 million tonnes a year from 2022 as Rio Tinto optimises its installed capital base. Automation, process efficiencies and debottlenecking should drive the volume growth. The new Silvergrass mine will also be at full production from 2019 onwards.

Outside iron ore, Rio Tinto’s production is tracking as expected with guidance for aluminium, copper, diamonds, and minerals unchanged. Our AUD 60 per share fair value estimate for no-moat Rio Tinto is retained. This was recently increased with our higher near-term iron ore price forecasts due to the supply disruptions. The high prevailing iron ore price is unusual and not expected to last. This is the key reason the shares are significantly overvalued. On the supply side, Brazil is key. Vale’s production is highly likely to return, but the question is over what time frame? How much will come in 2019, 2020 and 2021? That’s the unknown. Vale has lost more than 100 million tonnes of capacity including Samarco.