Rio Tinto (RIO)

Fat Prophets

Tuesday 28th October 2014

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Fat Prophets

Rio Tinto (RIO)

What’s new?

Another quarter of record iron ore production as Rio Tinto (RIO) reported its third quarter operational result to 30 September 2014. While its key business group did perform well, the remaining operations did find the going a little tougher.

Rio’s iron ore operations delivered a robust performance for the quarter. Production of iron ore was up by 13% on the same quarter in 2013, to a record 60.4 million tonnes. Rio’s Pilbara operations were the standout, following the reporting of a third quarter production record for iron ore of 58.2 million tonnes. The 14% rise, compared to the same quarter in 2013, was driven by improved productivity gains and the ramp-up of production following the early completion of the Pilbara 290 project.

Copper turned in a good result, with the business unit lifting production by 22% on the corresponding 2013 quarter, to 83,500 tonnes. Rio’s Kennecott mine was the main driver, with refined copper production rising by 35.4% on the corresponding 2013 quarter, to 62,700 tonnes.

In the face of difficult market conditions across all its coal offerings, production was softer. Rio’s key thermal coal unit delivered a 13% fall on the same quarter for 2013, to 5.5 million tonnes. Coking coal delivered a 14% fall to 1.9 million tonnes.

Rio’s aluminium business continues to struggle, reporting a 3% fall to 848,000 tonnes over the same quarter for 2013. The international operations were the drag on the result.

Outlook

Iron ore production has surged in the first nine months of 2014, to 216.2 million tonnes. With the company looking set to smash its annual iron ore production record of 266 million tonnes (100% basis) set only last year. Iron ore production guidance for 2014 remained unchanged at 295 million tonnes (100% basis).

Like iron ore, copper production for the first nine months has surged ahead to hit 254,000 tonnes. Production guidance for 2014 remained unchanged at 300,000 tonnes which looks very readily achievable.

Despite the softer quarter, Rio has upgraded its thermal coal guidance for the full year to 18 million tonnes from 17.5 million. While coking coal guidance was marginally downgraded to seven million tonnes from 7.4 million tonnes.

Overall, Rios’ the third quarter performance for its key business units, operationally, looks set for a good year. When the company reports its 2014 full year financials in February 2015, the volume variance will likely have a positive bias.

Price

Rio Tinto has been, in the past twelve months, trading in a broad sideways channel. Support can be found at the $57.50 level and resistance around the $67.00 level. The price is currently trading toward its 200 day moving average which could indicate a price breakout at the point of crossover.

Concerns surrounding China’s growth, as this country is the largest consumer of the commodity and a “wave” of new supply has kept the price in check. While its robust financial position with minimal debt in its balance sheet and strong cash flow, has, with its good operational performance staved off any major price fall. When confidence returns in the iron ore price, Rio Tinto will be well positioned to leverage off this event.

Worth Buying?

Rio Tinto is positioning itself to participate in China’s growing appetite for quality iron ore to meet the needs of its steel industry. As a low cost producer of iron ore with significant reserves, Rio Tinto is in an enviable position to meet this increasing demand both now and in the long-term. While Rio’s robust balance sheet and cash flow provide significant upside development opportunities out of its suite of tier 1 assets.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in Rio Tinto.

Greg Smith is the Head of Research at Fat Prophets share market research.

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