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 engaged in finding, mining and processing mineral resources. Co. has four product groups: iron ore, which supplies the global seaborne iron ore trade; aluminium, which includes bauxite mines, alumina refineries, and aluminium smelters; Copper and Diamonds, which has managed operations in Australia, Canada, Mongolia and the U.S., and non-managed operations in Chile and Indonesia, with by-product including gold, silver, molybdenum and others such as sulphuric acid, rhenium, and lead carbonate; and Energy and Minerals, which comprises mining, refining and marketing operations across borates, coal, iron ore concentrate and pellets, salt, titanium dioxide and uranium sectors.
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