2023-04-25 10:17:24 ET
Summary
- Q1 production was in line with our previous estimates. The company's output was favored by lower rainfall.
- La Granja mine to First Quantum was a positive deal.
- 2023 outlook came with no changes, and so we confirm our valuation.
Before analyzing Rio Tinto's ( RIO , RTPPF , RTNTF ) Q1 production report, it is important to highlight the company's latest news. Here at the Lab, we view the recent developments positively and believe they are a small positive on Rio Tinto's stock value.
Firstly, on the 31st of March, Rio Tinto agreed to sell a 55% equity stake in the La Granja mine to First Quantum (FQVLF) for a total consideration of $105 million. One of Mare Evidence Lab's criticism has always been Rio Tinto's commodity exposure to Iron Ore. At first sight, we have not well seen a copper mine sale; however, there is a strong strategic rationale for this transaction. Why? 1) The company has valid alternatives for copper growth within its current portfolio such as Resolution and Winu mines (which we believe are not yet properly valued by Wall Street), 2) Rio Tinto will retain a 45% equity stake in the project, and First Quantum has a solid track record of developing copper mines in challenging jurisdictions. Therefore, Rio Tinto will retain some exposure towards the upside; 3) Rio will contribute to the growth CAPEX; however, there will be no major investment before 2026. On a negative note, even if it looks like a good deal for First Quantum, La Granja's valuation looks fair, given the $546 million on initial disbursement which will be used for the feasibility study completion. Based on an EV/Resource multiple set at $53 per ton of copper, this deal is relatively cheap. However, as already mentioned, La Granja is still in a very early stage and there is a country risk to consider. Looking at Rio Tinto, copper's future growth potential might be also concentrated on Kennecott and Oyu Tolgoi expansions.
Over the long run, major miners' partnerships could be a positive sign. Here at the Lab, we believe that mining players have a strong strategic imperative to invest in new copper facilities. As already mentioned in our Anglo-American recent update , " China consumes more than half of the world's refined copper " and looking at Rio Tinto's iron ore exposure, the company is very well positioned to capitalize on secular long-term growth trends there as well. Demand for metals will very much follow EU-USA net zero trends. EV development, charging infrastructure, and renewable energy companies will require more metals than the current oil & gas industry. Therefore, Rio Tinto will be a winner in this transition period.
Q1 Production Results
As a reminder, our readers might have a look at our 2022 Q1 , Q2 , Q3 , and Q4 production analysis releases. In detail, below are the latest company results:
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Rio Tinto recorded a solid set of numbers in Iron ore shipments. This was supported by the Gudai-Darri ramp-up. Given weather impacts, iron ore Q1 output is usually weaker; however, the company already completed 25% of the FY 2023 midpoint outlook at 320-335mt. This was a solid start. On a negative note for 2023, mined copper guidance was cut to 590-640kt from 650-710kt on a conveyor outage at Kennecott (Fig 2). There are geotechnical challenges at Escondida mine and this is also a negative take for BHP . Despite that, Rio Tinto confirmed its cost guidance;
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At the Kennecott mine facility, c opper was weak. This was due to record snowfall and a belt failure. On the ESG side, the first sustainable production was achieved at Oyu Tolgoi underground;
- Also Bauxite was weaker than anticipated. Weipa facilities were affected by higher-than-average rainfall.
( Fig 1 )
Conclusion and Valuation
In our Q3 report , we positively view the company's ESG commitment. In the quarter, Rio Tinto becomes the first major mining player to disclose site-by-site water usage data. ESG has always been decremental for Rio, and with an independent report on Cultural Heritage, we believe this is a sign of further steps toward finding better ways to manage and protect heritage. Last time, here at the Lab, we decided to update Rio Tinto's production volumes; however, aside from a minor reduction in mined copper outlook, Rio Tinto's guidance was unchanged. Our fiscal year 2023 EBITDA was already adjusted by just 1%. We should also take into account a $140m potential CAPEX on the Rincon mine but it is partially offset by the La Granja disinvestment. Therefore, continuing to value the company with a 5x EV/EBITDA multiple, we reiterated our £72 target price (Australian price at A$140 per share). Here at the Lab, we suggest to our mining reader to have a look at our recent Anglo update .
(Fig 2)
For further details see:
Rio Tinto: Positive 2023 Start