Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

No-moat Rio Tinto’s 2024 first-half result was broadly in line with our expectations. Guidance is reiterated, and our forecasts are broadly unchanged. Adjusted net profit after tax of USD 5.8 billion or USD 3.54 per share (about AUD 5.45) was similar to last year. Adjusted EBITDA of USD 12.1 billion rose 3% on 2023. Improvements in copper, with EBITDA up 67% on higher sales volumes and copper prices along with lower unit cash costs, and aluminum, up 38% on lower input costs, more than offset Pilbara iron ore weakness.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

No-moat Rio Tinto’s 2024 second-quarter shipments of 66 million metric tons from Pilbara iron ore operations were similar to last year and broadly aligned with our expectations. While 2024 first-half shipments of 132 million metric tons (Rio’s share) are 3% lower than 2023, Rio maintains iron ore guidance, with sales likely to be higher in the second half of 2024, driven by seasonal factors. We still forecast 2024 Pilbara iron ore sales of 280 million metric tons (Rio’s share), similar to last year. We also reiterate our forecast for 2024 Pilbara cash costs of USD 23 per metric ton, about 6% higher than last year, driven by inflation. Rio’s average realized price of USD 106 per metric ton for the half is modestly higher than our forecast of about USD 102 for 2024.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

We retain our AUD 112 per share fair value estimate for no-moat Rio Tinto after a solid start to 2024. First-quarter sales are broadly in line with our expectations. Rio’s share of shipments from its Pilbara iron ore operations, the main driver of earnings, was roughly 66 million metric tons, 5% below the same quarter of 2023 and 10% lower than the previous quarter. Inclement weather was the main driver. Management made no changes to guidance, and we continue to forecast 2024 Pilbara iron ore sales of roughly 280 million metric tons (its share), similar to last year. We also reiterate our forecast for 2024 unit cash costs in the Pilbara of roughly USD 23 per metric ton, about 6% higher than last year, driven by inflation.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

No-moat Rio Tinto’s adjusted net profit after tax fell 12% to USD 11.8 billion or USD 7.21 per share, about AUD 10.92, driven by lower aluminum prices and higher unit cash costs. Adjusted EBITDA of USD 23.9 billion was 9% below 2022 but broadly in line with our estimate. The Pilbara iron ore business had a solid year. Average iron ore prices of USD 108 per metric ton were modestly higher than in 2022. Along with 4% higher volumes of about 280 million metric tons and modestly lower unit cash costs of roughly USD 22 per metric ton, close to our forecast, iron ore EBITDA rose 7%. The iron ore business continues to drive Rio’s earnings, comprising 84% of 2023 EBITDA. While Rio’s free cash flow of USD 7.7 billion fell 15% lower, the balance sheet remains very strong. Net debt of about USD 4.2 billion is minimal, roughly 0.2 times EBITDA. Rio will pay a fully franked final dividend of USD 2.58, about AUD 3.91, in April. Total 2023 dividends of USD 4.35 (AUD 6.59) were down 12% on lower earnings, but the 60% payout ratio is at the top end of Rio’s target.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2023. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

No-moat Rio Tinto’s 2023 fourth-quarter sales were in line with our expectations. Its share of sales from its Pilbara iron ore operations, the main driver of earnings, was roughly 280 million metric tons in 2023, 4% above last year. Rio is on track to meet our forecast for 2023 Pilbara unit cash costs of around USD 22 per metric ton, modestly higher than 2022, when it reports its 2023 earnings in February. We forecast similar Pilbara iron ore sales and unit cash costs in 2024. Rio’s Pilbara operations account for roughly 80% of our forecast 2023 EBITDA of about USD 24.7 billion. Assuming a 55% payout ratio, we forecast 2023 dividends of USD 4.30, or around AUD 6.40, per share, representing a fully franked yield of about 5% at the current share price.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 54% of sales in 2022. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

No-moat Rio Tinto’s 2023 third-quarter sales met our expectations. Its share of shipments from its Pilbara iron ore operations, the main driver of earnings, was roughly 72 million metric tons, 3% above the same quarter of 2022 and 8% higher than the previous quarter. Rio is on track to meet our forecast for 2023 Pilbara iron ore sales of roughly 280 million metric tons (its share), around 4% above last year. We reiterate our forecast for 2023 unit cash costs in the Pilbara of roughly USD 22 per metric ton, modestly up on 2022.

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 54% of sales in 2022. We think the outlook is for earnings to materially decline with demand for many commodities likely to soften with the end of the China boom, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment.