Rio Tinto Ltd (ASX: RIO) is one of the world’s largest metals and mining company. Rio Tinto produces iron ore, aluminum, copper, diamonds, titanium and borates. Rio Tinto has 60 operations and projects around the world and around 37,000 suppliers. Rio Tinto has a market capitalisation of A$33 billion.

What are the key features of Rio Tinto’s quarterly activities report?

Rio Tinto’s production levels are as follows: Pilbara iron ore production for Q1 2020 is 77.8 Mt (up 2% from Q1 2019); bauxite production for Q1 2020 is 13.8 Mt (up 9% from Q1 2019); aluminum production for Q1 2020 is 783 kt (down 2% from Q1 2019); copper production for Q1 2020 is 133.0 kt (down 8% from Q1 2019); titanium dioxide slag production for Q1 2020 is 293 kt (down 1% from Q1 2019); and IOC iron ore pellets and concentrate production for Q1 2020 is 2.6 Mt (up 3% from Q1 2019).

Pilbara iron production and shipments improved on the corresponding period due to a recovery across the networking in Mach following tropical cyclone Damien in February 2020. Bauxite was up strongly compared with the corresponding period following the successful ramp-up of Amrun in 2019. Copper production fell compared with the corresponding period due to lower copper grades. The rest of the Rio Tinto production activities are broadly in line with the previous year.

What has been the impacts of COVID-19?

A positive for Rio Tinto is that demand from China in respect to iron ore and bauxite has remained strong in Q1 2020, notwithstanding COVID-19 concerns. However, demand for aluminum declined in Q1 2020, mainly due to lower automotive production because of concerns around COVID-19. In addition, demand for copper remained reasonable, but the decline in the price reflects deteriorating industrial growth expectations globally.

Regarding Rio Tinto’s operations, the company has reduced mining operations at Richards Bay Minerals in South Africa in compliance with a government directive to lockdown on 26 March for 21 days. Rio Tinto has shut down the fourth pot-line at the Tiwai Point smelter in New Zealand with production continuing the other three lines to comply with government lockdown requirements for containing the spread of Covid-19.

What is the outlook for Rio Tinto?

Rio Tinto management broadly maintained production guidance for FY20.

In general, it is expected that production in the iron ore and aluminum businesses will be broadly flat, while production in the copper and diamond business is expected to fall. The flat outlook for iron ore production is a little below market expectations. For the minerals and energy business, production of titanium dioxide and borates is expected to be flat. This means that changes in commodity prices will drive Rio Tinto’s FY20 earnings rather than changes in production.

In terms of commodity prices, the key question now for investors is will the iron ore price remain strong over the remainder of 2020. The Brazilian iron ore producer Vale is expecting iron ore production in 2020 to reach pre tailing dam collapse levels. This could increase total supply of iron ore in the global market reducing the price. Over the medium to long term, it can be expected that the iron ore price will fall from current levels of around US$90 per tonne to around US$50 per tonne.

What is the market reaction?

The market reaction to Rio Tinto is slightly positive. Rio Tinto is up around 3.5% (ASX200 up around 2%) and is currently trading at A$91.64. Rio Tinto has a forward P/E ratio of around 9x and has an annual dividend yield of around 5%.


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

April 17, 2020