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Operational performance/workplace issues weigh on Rio’s first quarter: Better days ahead

Wed 20 Apr 22, 2:54pm (AEST)
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Key Points

  • Macquarie expects iron ore prices to underpin strong earnings upgrade momentum
  • Rio's iron ore division has posted another poor quarterly performance
  • Operational performance & workplace issues took their toll on operations

Given that Rio Tinto (ASX: RIO) had previously warned of lower output in the earlier part of 2022, today’s revelations that the iron ore division had posted another poor quarterly performance, should not have come a big surprise to the market.

But that didn’t stop the iron ore giant’s share price from trading -1.69% lower, following news that Rio had shipped 71.5m tonnes of iron ore in the March quarter – lower than UBS’s 72m tonne forecast - down -8% on the first three months of 2021, including 10.9m tonnes of lower grade products.

The iron ore giant had previously flagged it expected lower output in the early part of 2022 due to difficulties bringing its new Gudai-Darri mine online and making up the gap in higher grade output.

FY guidance on track

Management noted that its operations were negatively impacted by the opening of WA’s hard border to interstate visitors and expects ongoing impacts of coronavirus cases to continue into the current quarter.

"Ongoing mine depletion was not offset by mine replacement projects, with delayed commissioning of Gudai-Darri (first ore still forecast for the second quarter of 2022) and ongoing commissioning challenges at the Mesa A wet plant continuing to impact production ramp up at Robe Valley,” Rio noted.

The company expects increased production volumes and improved product mix in the second half with the commissioning and ramp up of Gudai-Darri, commissioning of the Robe Valley wet plant and improved mine pit health.

The company has guided to no change in full year shipments of 320 to 325m tonnes of iron ore in 2022, compared to FY 2021’s production of 322m tonnes.

Copper & aluminium production

Beyond iron ore, Rio produced 125,000 tonnes of refined copper over the quarter – up 4% on the first quarter of FY 2021 - and has stuck to guidance for total production between 500,000 and 575,000 tonnes, compared to 494,000 tonnes in FY 2021.

Due to reduced capacity at its Kitimat smelter following a strike, aluminium production at 0.7m tonnes was -8% lower than the first quarter of FY 2021.

The company guided to FY22 aluminium production of 3.1Mt to 3.2Mt, in-line with FY 2021.

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Rio's share price performance over six months.

What brokers think

Based on the brokers that cover Rio (as reported in by FN Arena), the stock is currently trading at 1.6% upside to the price target of $121.35.

Macquarie notes iron ore prices underpin strong earnings upgrade momentum and maintains an Outperform rating and price target of $140.00.

Morgan Stanley retains an Overweight rating and target price of $130.50, but at time of last update (29/03/22) had not yet included the Simandou iron ore project in the broker’s base case for Rio.

Morgans retains a Hold rating and target price of $107.00 and expects growth in iron ore pricing growth to slow. The broker notes that strong earnings from Rio are offset by the company's ongoing operational issues.

Despite a challenging March quarter, Goldman Sachs expects Rio to return to production growth in mid-2022 on higher iron ore and copper volumes.

The broker rates Rio a Buy with a target price of $136.50.

Consensus on Rio is Moderate Buy.

Based on Morningstar’s value of $119.56, the stock appears to be fairly valued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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