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Sequential growth in 3Q23 production RIO delivered sequential production growth in 3Q23, aside from titanium dioxide slag, and left 2023 guidance unchanged outside of IOC''s pellets and concentrates, which has been revised lower for a second consecutive quarter. Pilbara shipments increased +6% q/q with SP10 a larger proportion of shipments and expected to amount to 45-50Mt (13-15%) for 2023 volumes. RIO continues to expect 2023 shipments in the upper half of the 320-335Mt guidance range (BNPPE: 331Mt). Mined copper increased +17% q/q with the Kennecott concentrator recovering from the conveyor failure in March 2023. Diamonds, having already achieved 89% of the low-end of 2023 production guidance looks the most derisked while IOC, despite two guidance cuts already, is the least at 70% of the low end of the guidance range. Pilbara takeaways The recent Pilbara visit focused on RIO''s ambitions to increase iron ore shipments +7-8% to 345-360Mt over the mid-term while decreasing unit costs to USD 20/t on higher volumes and efficiencies more than offsetting a more difficult mining work index. Gudai-Darri ramp has progressed well, achieving nameplate (43Mtpa) within 12 months of commissioning and phase 2 (incremental 7Mtpa) is expected by 2025. Estimate revisions We update for 3Q23 production results which leads to marginal revisions on 2023 (unch) and 2024 (-3%) EBITDA forecasts. Despite the minor downgrades, we increase our TP to 5,880p (prior 5,730p) on lower discount rate to reflect the latest risk-free rate and equity/country risk premiums. We continue to derive our TP via a 50/50 weighting of ROCE/WACC and DCF. Detailed table of estimate revisions can be found later in this report.
Rio Tinto plc
Today's news and views, plus announcements from: RIO, RR., STJ, BWY, BBOX, MONY, SRP, PDL, & SHOE.
Rio Tinto plc Petra Diamonds Limited
Pilbara tracking at upper end, IOC needs to catch up Pilbara shipments in 1H23 have been strong, with five consecutive quarters of improved operational performance, and RIO targeting the upper end of guidance 320-335Mt (BNPPE: 331Mt) and further sequential growth in 3Q23 and 4Q23. Conversely, IOC has only achieved 46% of the lower end of FY23 guidance in 1H23 as it effectively lost one month of production due to wildfires in Quebec. We forecast +23% h/h growth in 2H23 for IOC which would still leave it at the bottom end of guidance at 10.2Mt (guidance 10.0-11.0Mt). Focus on iron ore with Pilbara visit nearing On 9-11 October, RIO will be hosting a visit to the Pilbara, focused on port and rail operations, the Gudai-Darri mine and Rhodes Ridge Project. Similar to the visit to Oyu Tolgoi in July (our takeaways here), we don''t expect any radical deviation in strategy but rather a continuation of the strategy of increasing quality tonnes in a measured approach. Gudai-Darri achieved nameplate capacity during 2Q23, helping to offset depletion in other parts of the portfolio. At Rhodes Ridge, an Order of Magnitude study is due to be completed by year-end, envisaging a 40Mtpa initial plant capacity. The project''s total resources (100% basis) are 6.7bn tonnes grading 61.6% Fe, equivalent to 1/3 of RIO''s existing resource base in the Pilbara. Development would help to secure high-grade iron ore production for RIO for decades. Earnings and TP increased on iron ore revision Infrastructure spending in China looks set to accelerate in calendar Q4 after the increase in government financing just reported, which should help stabilise economic trends. Delayed steel production curbs have supported iron ore. We now forecast 2023 and 2024 iron ore of USD 113/t and USD 90/t (prior: USD 105/t and USD 85/t) to reflect the higher starting point: as a result, our EBITDA forecasts are increased by +8% and +7% in 2023 and 2024 respectively. But we continue to see...
Today's news and views, plus announcements from: RIO, AHT, CLDN, MEN, TIFS, ECOR, CRW, SRC, & VNET.
RIO ECOR VNET
Today's news and views, plus announcements from: RIO, BNZL, IGG, BYG, & DXRX.
Rio Tinto plc Diaceutics Plc
Today's news and views, plus announcements from: RIO, GCP, MYI, RMII, FBH & EMIS.
Iron ore performed well in 1H23 while copper faced headwinds from poor performance at Kennecott. Both are targeting stronger h/h volumes but whereas iron ore is looking to build on strength, copper is trying to regain its footing. WC alleviation will support H2 FCF but be capped by a material step higher in capex. 1H23 wrap Very much an in-line result vs consensus with Pilbara unit cash costs at the low end of the full-year range in 1H23. FCF was ahead of expectations despite a well flagged USD 0.9bn WC headwind, which should mostly unwind in 2H23. Please see our more detailed breakdown here. Most vs least de-risked production into H2 Diamond guidance for 2023 (3.0-3.8mcts) is -27% y/y at the mid-point as an underground pipe and area of the open pit at Diavik was completed in 1H23. Guidance looks to be sufficiently rebased as 1H23 diamond production has already achieved 64% of the low end of 2023 guidance. Conversely, IOC has only achieved 46% of the low end in 1H23, but having lost effectively one month of production due to wildfires in Quebec there is a clear pathway to catch up assuming no further material disruptions. Pilbara shipments have been strong, having achieved five quarters of improved operational performance, and RIO is targeting the upper end of guidance and further sequential production growth in 3Q23 and 4Q23. Estimate tweaks Post results we trim 2023 and 2024 EBITDA forecasts by -3% and -1%, predominantly driven by downgrades in Minerals and with some offset in Aluminium. Our volume assumptions are left unchanged as we had updated post 2Q23 production results for the respective revisions to guidance. Updated assumptions feeding into the discount rate drives a small TP upgrade to 5,420p (prior 5,260p) which we continue to derive via 50/50 weighting to NPV and ROCE/WACC. Revisions table can be found overleaf. Reiterate Neutral.
Rio reported weak H1 results due to commodity pricing headwinds. This wasn’t surprising as the Chinese rebound has been disappointing. While the way forward isn’t easy – as China has serious issues at hand, by virtue of its legacy over-exposure and enviable competency in mining the key steel-making ingredient, the Iron Ore division is a cash-cow, which can help (partly) compensate for issues in other divisions and also facilitate a good balance between growth investments and rewards. Overall, a strong fossil-free diversified mining bet.
RIO reports 1H23 results pre-market on 26 July. Our 1H23 underlying EBITDA forecast of USD 12.4bn is +3% ahead of consensus while our FCF forecast of USD 3.0bn is -23% vs consensus, as we integrate the guided WC headwinds from 2Q23 production results. Ahead on EBITDA, conservative on FCF Into 1H23 results, we forecast underlying EBITDA of USD 12.4bn, +3% ahead of Visible Alpha consensus. Despite this, our FCF estimate of USD 3.0bn is materially below consensus of USD 3.9bn (-23%). This is principally driven by the integration of a USD 900m WC headwind, guided to alongside 2Q23 production results, reflecting among other items an increase in blasted and mine stocks in Pilbara. We expect consensus FCF estimates will decrease into the print as this is taken into account. Net debt is forecast +USD600m vs December year-end to USD 4.7bn. We forecast an H1 divi of USD1.93/sh (consensus USD 1.87/sh), implying a 50% payout of underlying EPS. Slower start to the year for copper Ramp up of the Oyu Tolgoi underground is progressing well (see our site visit note here) but operations at Kennecott have faced headwinds in H1 from a conveyor failure in March 2023 leading to reduced operating rates at the concentrator. Escondida has also had challenges from unplanned maintenance and crusher and conveyor availability. We forecast 1H23 copper C1 unit costs to be slightly above the top-end of full-year guidance range (USD 2.02/lb vs USD 1.80-2.00/lb range) before declining in 2H23. Minor revisions post 2Q23 production results We update our model for 2Q23 production results and alongside minor forward operational adjustments. We revise downward 2023 and 2024 EBITDA forecasts by -4% and -2%. Our 2023 cost assumptions are now in the upper half of respective guidance ranges; iron ore Pilbara cash costs of USD 22.3/t (guidance USD 21.0-22.5/t) and copper C1 cash costs of USD 1.91/lb (guidance USD 1.80-2.00/lb). Reiterate Neutral rating and 5,260p TP.
Iron Ore World’s monster miners have just finished a busy week reporting their production results. Vale + Rio Tinto + BHP (+ Anglo American) – which together deliver ~1Bnt/yr of ore to the seaborne market (65% of total) – all managed to hit-or-better production/sales guidance. Here, we list key comments made by CEOs + flag how these results stack up against our forecasts + roll through the seaborne ore trade’s current collection of market signals…
RIO BHP AAL
While RIO''s Pilbara shipments are now targeting the upper half of 2023 guidance range, other metals are facing headwinds. Volume guidance was cut for alumina, refined copper, IOC and the lower end of range now targeted for bauxite and titanium dioxide slag. Copper C1 cost guidance revised higher. Pilbara in-line with plan RIO reported Pilbara iron ore shipments (100% basis) of 79.1Mt, -1.7% vs Visible Alpha consensus. Gudai-Darri achieved nameplate capacity during the quarter while shipments faced headwinds from planned major maintenance at the port of Dampier and a train derailment. Despite that, RIO now forecasts shipments to be in the upper half of the 320-335Mt guidance range (consensus: 331Mt). Cash cost guidance for iron ore unit costs remain unchanged at USD 21.00-22.50/t. Conversely, RIO''s Canadian operations (IOC) have struggled with 2Q23 pellet and concentrate volumes of 2.1Mt (-24% vs consensus) and 2023 volume guidance cut to 10.0-11.0Mt (consensus: 10.8Mt, prior 10.5-11.5Mt) due to wildfires in northern Quebec which led to 3.5 weeks of lost production. Copper headwinds 2Q23 mined copper production of 145kt was -2.2% vs consensus while refined copper production of 36kt was +3.4% vs consensus. While Oyu Tolgoi''s ramp-up was a tailwind, this was more than offset by continued lower operating rates at Kennecott''s concentrator and unplanned maintenance and lower crusher and conveyor availability at Escondida. 2023 mined copper production guidance is unchanged but refined copper guidance was cut -12.5% at the mid-point to 160-190kt (consensus: 197kt, prior: 180-210kt). The same underlying driver, the extended Kennecott smelter rebuild also drove an increase in guided copper C1 cash costs to USD1.80-2.00/lb (prior USD 1.60-1.80/lb). Mixed performance in Aluminium 2Q23 production of bauxite 13.49Mt (-2.6% vs cons), alumina 1.86Mt (-4.9% vs cons) and aluminium 0.81Mt (+1.5% v cons). Guidance for bauxite now expected to be at lower end of...
A visit to Rio Tinto''s Oyu Tolgoi copper mine in Mongolia left us more confident in the ramp up of underground operations which commenced in 1Q23. Drawbell firings and undercut firings are running ahead of plan while associated infrastructure (shaft sinking and conveyor to surface) is progressing well. RIO''s ambitions to double copper production by end of decade rely heavily on the successful execution of underground mining at Oyu Tolgoi. Drawbell firing rate ahead of industry average Drawbell firings are ahead of 2023 YTD plan (54 opened as of 30 June 2023) and for the last five months averaging 6 per month vs industry average of 4-5. Similarly, undercut firings are ahead of plan and aligned to drawbell firings. Cave construction is outperforming RIO''s expectations and sustaining development metres and ore tonnes hoisted are both ahead of 2023 YTD plans. These all read positive for the ramp-up of underground operations. Hugo North Lift 2 is expected to be in the resource model mid-2024 while early-stage evaluation of potential downstream processing at Oyu Tolgoi is progressing. Underground infrastructure progressing well Solid progress is being made in the supporting infrastructure for underground operations. Shaft 3 and 4 commissioning is in 2H24 (52% and 60% complete) and recent monthly run-rates are ahead of the pace required to meet those timelines. The conveyor to surface (51% complete) is to be commissioned in 2H24. Mining and Mongolia The mining industry is critically important for Mongolia, representing 28% of GDP. Since 2011, c50% of total foreign direct investment into the country was the investments into Oyu Tolgoi. Mining is 93% of Mongolia''s total exports and while the largest is coal at 52%, copper (predominantly Oyu Tolgoi and then Erdenet) is still 22%. The next parliamentary election is June 2024.
A mining company the size of Rio Tinto requires long periods of time to structurally change its metals mix. With Oyu Tolgoi underground commissioning and ambitions to double group copper production by the end of the decade, Rio Tinto is embarking on this journey. But iron ore will be the dominant driver of the PandL for some time, remaining 60% of EBITDA medium-term.
A mining company the size of Rio Tinto requires long periods of time to structurally change its metals mix. With Oyu Tolgoi underground commissioning and ambitions to double group copper production by the end of the decade, Rio Tinto is embarking on this journey. But iron ore will be the dominant driver of the PandL for some time, remaining 60% of EBITDA medium-term. We transfer coverage of Rio Tinto to Alan Spence, reiterate a Neutral rating and 5,260p TP. Quantifying Oyu Tolgoi''s Importance We''re visiting RIO''s Oyu Tolgoi mine the week of 10 July, the company''s key lever for growing copper exposure. Underground commissioning was achieved in 1Q23 and prioritising its higher grade ore (3x vs open pit) is a key factor in driving the mine''s average copper production from c340ktpa till 2027 to c500ktpa in 2028-2036 with a peak year of 600kt. RIO''s 66% share in Oyu Tolgoi is 10% of our NPV before corporate adjustments. At the site visit, we expect RIO will look to provide confidence over the timing of panels 1 and 2, shafts 3 and 4 (expected commissioning in 2024), total capex and any potential changes in the production/cost schedule laid out in the 2020 Feasibility Study. Early stages of copper growth but a re-rating will need to wait While a successful ramp up of Oyu Tolgoi will be key if RIO is going to succeed in its target of doubling copper production by the end of the decade, the equity is unlikely to draw a copper multiple. We forecast copper reaching 21% of group EBITDA by 2025 and 27% vs 2030 (vs 9% in 2022), while iron ore remains 60% of EBITDA in the medium-term and the primary driver of the PandL. Downside risks to Iron Ore create potential headwind to dividend We published takeaways from our recent China trip (here). While we came away more constructive on EVs, renewables and home appliances, the housing sector is struggling with fears of a double dip in resi and record high vacancies in non-resi. We see downside risk to iron ore...
Iron ore heading towards a lower equilibrium price from H2 onwards. A price taker market On the back of our most recent field trip to China, we downgraded our crude steel production forecast to -2.1%, with real estate steel demand (30% weighting) now set to decline by -16% y/y on our numbers, more than offsetting growth in other markets. Steel production curbs are on the cards in H2 after steel margins were hit. We forecast an 84mt surplus in the seaborne export market in 2023 (5.5% of global seaborne trade). The cost/price support from domestic production in China is likely to wane as these marginal low-grade tonnes will not be needed, and as steel mills will pivot towards a higher-grade mix to support their decarbonisation targets. Our excess supply estimates suggest an USD80-100/t range would be a justifiable level (below current spot at USD115/t CFR), until the large Simandou project ramps up (2025-2027) and displaces more high-cost tonnes. Current prices have been distorted by large speculative positions in iron ore futures used as a hedge against the weaker RMB. We favour exposure to Base Metals (Copper, Aluminium) over Iron Ore structurally. Iron ore majors discounting lower iron ore prices, but differ on their degree of diversification BHP Group''s exposure is already more diversified with c.57% of its EBITDA in CY2023e from iron ore and balanced on a mid-cycle basis before potash should bring more dilution. Rio Tinto''s c.71% EBITDA dependency on iron ore is high. While Oyu Tolgoi will help, further diversification efforts will be needed in the future. Vale''s c.82% EBITDA exposure to iron ore is more problematic. Admittedly, the group''s growth strategy in high-grade aggregate products should yield a premium, but it is a premium over a surplus market. Upgrading BHP to (=), downgrading Vale to (-), Rio Tinto unchanged at (=) BHP''s productivity efforts have yielded visible results on unit cost, even if not immune to inflation. Our...
RIO BHP VALE
The Restocking Indicator is having a bearish year. The signal has reported a SELL, or very close to it, since late January. This month saw the sharpest new orders contraction since last July. Mills remain firmly in destock mode; China’s reopening trade continues to disappoint; confidence in real estate is weak. We still expect market signals to define floors in H2, with upside risk building later in the year – most likely on 2024’s industrial restock.
RIO GLEN AAL ANTO
The Restocking Indicator has switched to a SELL, after flirting with this threshold over the last two months, reflecting a deterioration in China’s industrial activity. It seems that China’s post-lockdown bounce for steel was just a seasonal uptick. Key factor here being that China’s industrial base was never really impacted in H2’22 vs. H1’20 (first lockdown). And now, demand is slowing faster than we would expect for this time of year (Miner’s equityDECK - Fading Bears (44 pgs)). We continue to expect a general commodity price floor to form in H2’23.
RIO AAL GLEN
It’s late April – typically the peak of the China-dominated seasonal restocking cycle for iron ore’s seaborne trade. Landed prices for China’s imports should be relatively high right now + stable for at least the next 2-3 months. Instead, China’s Dalian exchange has reported a general 20-25% price slide over the last 6 weeks, with landed fines’ futures dipping below US$100/t this week – the lowest level since Dec-22. Yes, we’re ore price bears, but the speed/timing of this sell-off is a surprise to us. Is the price drop supported by signals elsewhere in China’s rust industry? Here, we review the state-of-play in the ore/steel trade + list short-term price drivers + explain our latest S/D/price forecasts…
Today's news and views, plus announcements from: HLN, REL, RTO, RIO, SGRO, AJB, BAB, DNLM, FAN, SMWH, DELT, GHE, MTW, ROO, & PAY.
The Restocking Indicator stays on HOLD, and so matches up with our short-term expectation that iron ore prices will be range bound for the next couple of months. There has been an improvement in domestic demand, but no post-lockdown ‘fireworks’ in play. Certainly not enough to get China’s steel mills, or us, excited on the short-term steel/ore outlook. Worth keeping an eye on rising pollution levels, for this could prompt policy action and lift lump/pellet/high grade premiums – bullish for AAL/FXPO.
RIO AAL GLEN ANTO FXPO
It’s all happening, over in China. Based on Feb-22’s PMI data, economic activity has bounced out of lockdown-lows (again), an event that is coinciding nicely with China’s vast industrial base’s post-winter seasonal uptick. Got lots of excited investors asking us what the China-related upside risk is now, for the seaborne rust trade (China takes >70% of total trade). Problem is, for investable upside in China’s imports/prices, we need its central govt. to remove a perennial cap on the country’s total annual steel production rate (capped at previous year’s output, since 2021). Perhaps they’ll do that this year – just to support broader economic activity, and get to its brand new 5.0% growth target? Here, we test our iron ore model with 3 x crude steel output rate scenarios for China vs. our Base Case…
The Restocking Indicator has upgraded to HOLD, after reporting a sell last month. Domestic demand has improved, although it is still being outpaced by the expansion in finished inventories. We believe a neutral sector call is sensible, ahead of China’s National People’s Congress this weekend. This annual event typically features the central government’s growth strategy for the year. Note, we do not expect stimulus fireworks, given the demand recovery reported over recent months. Statements on post-lockdown growth consolidation, stabilising consumer growth, protecting the economy from ‘external threats’, etc. seem more likely to us.
RIO AAL GLEN ANTO
Due to pricing normalisation for all focus base metals, Rio witnessed a sharp 2022 operating performance moderation – which was worse than expected. Even though prices have recovered recently – thanks to China’s re-opening euphoria, sector-wide (cost) challenges are likely to persist/aggravate. Luckily, via a bigger dependence on high-margin iron ore, aluminium differentiation (vs. peers), good progress on copper ambitions and promising diversity/growth initiatives, Rio remains one of our preferred diversified miners. Although, our stock recommendation, with limited upside, should be maintained.
Today's news and views, plus announcements from: RIO, LLOY, PHP, TRIG, & FUTR.
Rio Tinto plc Primary Health Properties PLC
Our Restocking Indicator remains on HOLD for January, as inventories outpace a recovery in domestic demand. No, we don’t see another post-lockdown recovery trade. Still, there’s news that China may be softening its “three red lines” for its real estate developers. Given how quickly the government backflipped on zero-COVID, this latest event could be a meaningful re-boot for construction too. Perhaps houses are for speculation again? Even if this were true, it will be difficult to convince buyers to re-engage, after the troubles of 2022. We maintain our neutral sector stance.
RIO GLEN AAL ANTO FXPO
Yesterday, the govt. of Indonesia announced that the country’s 20Mtpa of bauxite exports would be banned from June next year. It’s the latest adjustment to a general trade policy that has been in place since 2014, which restricts the export of unprocessed minerals from Indonesia – a key source of bauxite, nickel, tin, copper and thermal coal. Some investors are surprised by this report, since Indonesia is already under EU-prompted WTO pressure to reverse its similar ban on nickel-bearing ore exports. Here, we give Indonesia’s bauxite exports some global context + explain the risks for downstream oxide/metal /equities...
According to Bloomberg, China is close to deploying a brand new, locally based (i.e. state-owned) ore pricing platform – China Mineral Resource Group. It’s not an overnight thing; been working on it for years; key point in Bloomberg’s report = agency is now talking with seaborne’s ore mining-Majors RIO-BHP-VALE. Here, we explain: 1. the motivation for China to create this agency; 2. why/how ore trade conditions are likely to change over the longer term, with CMRG’s roll-out; and more specifically, 3. why CMRG probably creates an incentive for iron ore’s long-dormant oligopoly to develop a joint supply strategy (Iron Ore – Games we play, 15-Sep-22).
After three months of reporting BUY, our Restocking Indicator has finally switched to a Hold for December, thanks to a fall in China’s domestic demand. We were suspicious of September’s surprise upgrade (see here). Turns out, China’s steel production rate really did lift on a demand recovery. The sector’s been up 20.1% since then. Anyway, from here, we move into a seasonally strong period for iron ore’s trade: wet season-hit supply and restocking mills – prompting a short-term bullish bias. Key risk? An extension to China’s zero COVID policy in 2023.
RIO AAL GLEN FXPO ANTO
Today's news and views, plus announcements from: SMDS, LGEN, RIO, BOY, LIO, YNGA, & GLE.
Today's news and views, plus announcements from: RIO, GSK, NXT, MGNS, HSX, GROW, AML, WIZZ, SMD, & FDEV.
Rio Tinto plc Spectral MD Holdings Limited
This week’s China data dump – GDP quarterly + Sep-22 monthly numbers – belatedly delivered post-20th Congress, offered little for investors to be optimistic about. Real estate has yet to show any signs of inflection, and is unlikely to do so until house prices somehow stabilise. Infrastructure continues to be the bright spot, particularly in utilities. But how far can local government stretch the balance sheet to support this sector, given falling land sales. Only meaningful takeaway from last week’s leadership congress is that Xi’s ‘yes-men’ are now entirely in charge. For this new-look central government – it seems that political expediency is more important than high quality economic growth.
RIO AAL ANTO
Today's news and views, plus announcements from: RIO, AVV, PAGE, 888, MONY, JET2, ORPH, CYAN, & FARN.
Today's news and views, plus announcements from: RIO, MSLH, PRTC, JDW, SOLG, DNL, SND, & ACQ,
Iron ore’s mining Majors have not made a big strategic decision on supply growth for over a decade, despite reporting super-profits. But things are changing. China is busily developing its own ore supply options, including the giant Simandou mines. Why? China is convinced that the Big-4 – Vale, Rio Tinto, BHP, FMG – possess significant ore pricing power. Is this true? Here, we review five separate S/D/price scenarios to determine if alternative strategies deliver better returns for key players. We have also revised our production forecasts for Rio’s Simandou/Pilbara mines.
RIO AAL FXPO
Today's news and views, plus announcements from: AHT, SMDS, RIO, CNE, BYG, AMTE, AMRQ, AVAP, PEBB, UBG, INL & AVAP.
Rio Tinto plc Avation PLC
Today's news and views, plus announcements from: RIO, RKT, WPP, SEIT, KNOS, AWE, 1SN, AVCT, APP, DOTD, BOOM, & AMRQ.
RIO SEIT AVCT APP
Finally, Rio has managed to convince THR’s shareholders, and eventually tightened its grip on the highly-promising Oyu Tolgoi copper asset. In effect, the firm is on course to realise its underlying copper potential. Even though worsening Chinese growth risks are likely to take a further toll on iron ore-heavy miners, the likes of Rio, which also has valuable business diversity via aluminium and ample balance sheet cushion, remains worthy of a re-rating.
China’s steel industry is in sharp contraction on all fronts, responding to collapsing domestic demand. Persistent data weakness has prompted our Restocking Indicator to report its fourth sell signal in a row, despite falls in output. Finished goods inventories remain too high, which should trigger further destocking. China’s on-going series of govt.-backed bailouts of unfinished housing projects has yet to convince stakeholders that we have arrived at the lows of this downcycle. Maintain SELLs on BHP, RIO and ANTO.
Although Rio’s H1 results were ahead of the street’s expectations, the performance moderation – due to falling iron ore prices – was evident. Fortunately, Aluminium and Minerals provided a useful cushion. While prices are expected to remain volatile/weaken further, the very-high dependence on high-margin (>50%) iron ore and favourable dynamics in aluminium imply that the firm remains well-positioned to withstand the on-going challenges. Add to this the copper exposure ‘differentiation’ vs. peers plus the potential ESG improvement benefits and Rio’s attractiveness remains intact.
China first publicly expressed its frustration with the pricing of seaborne iron ore in late 2003 – when >90% of the trade was archaically priced on annually-set contract terms. Back then, CISA – chief-rep of China’s rapidly growing steel industry – threatened to somehow take control of ore pricing from the mining Majors: Vale (CVRD) + Rio Tinto + BHP (BHPB). It was an odd trade tantrum to observe, but no one took it seriously. Prices were rising simply because the miners were struggling to meet China’s ‘Super Cycle’ ore/steel demand spike. Now, almost 20 years on, CISA probably thinks that it will soon finally preside over the demise of the Majors’ so-called pricing power. Why? Last week, China created a centralised ore-trading ‘agency’ = CMRG. Here, we explain the CMRG’s real role, and why it makes no difference to the price outlook of iron ore.
Another tough week in Commodity World. We see 3 x bear factors undermining demand/prices for these markets and exposed equities: Russian trade grief + US inflation + China’s struggling growth story. Here, we explain/illustrate themes being discussed with investors of our sector (EU energy dramas + US Fed risk + iron ore’s <$100/t again)…
Today's news and views, plus announcements from: RIO, BRBY, AML, HICL, N91, AVAP, PMI, & FEVR.
RIO HICL AVAP
Last Thursday, global markets bounced on a report of an infrastructure stimulus package being considered by China’s central government. Its great news, if you’re a tactical trader with a 12-hour outlook. For fundamental analysts like us though, this story’s a fizzer. China already has >US$5tn of stimulus in play for 2022. Does pumping another $220bn into its thoroughly built-out infrastructure sector make a sustainable difference to the state of this economy? Besides, the fact that so much stimulus is needed simply to support growth seems inherently bearish. Where are one of those ‘Super Cycles’ when you need one? Here, we list the issues facing China’s latest infra-package + explain why the market’s bullish response was so short-lived…
RIO GLEN ANTO
Last week, Asia’s markets began talking about China’s official steel production cap again. Why? Probably because it was about this time last year when the central govt. strictly imposed 2021’s cap (at <2020’s total). The fact that China’s finished steel inventories are now ballooning like its 2009 + demand’s dropped off its perch, may be other reasons (Restocking Indicator still says ‘Sell’, 30-Jun-22). Time to figure out how much rust China’s 1Bt/yr steel industry needs for 2nd-half 2022…
Rio Tinto plc Ferrexpo plc
Today's news and views, plus announcements from: ANTO, RIO, WTB, CCL, SMWH, KAV, MTU, MOTR, FARN, & TAM.
Two diversified behemoths. Two dynamic groups standing at a strategic crossroads and facing up to the challenges of energy transition and ESG. Surely head-to-head this is a score draw? As ever, the devil is in the details. We dive into shifting portfolio strategies, capex needs, current asset performance, the nitty-gritty of pipelines, ESG, and the enticing but tricky prospect of MandA. While BHP''s pivot from petroleum gears it up for a fossil-fuel-lighter future, until Jansen Potash kicks in around 2027, diversification and growth look challenged. With the valuation premium well above five/ten-year average, we are Underperform. Rio is better placed, on its 2021 iron ore replacement cycle, clear capex budget, aluminium business and lithium/copper growth: Outperform.
RIO BHP BHP
Russia’s invasion occurred at a time when industries worldwide are struggling with weak supply growth in crude oil, gas and coal. Still, in response to this war, many countries are cutting energy imports from Russia – and seek new supply options. Global energy trade flows are re-aligning, lifting the cost of fuels and power generation everywhere. Energy World is undergoing a long-term structural change. It’s time to revise our long-term prices.
RIO AAL GLEN TGA
We hosted 24 Metals, Mining and Steel companies on 22-24 March for the 17th edition of our Basic Materials Conference. With the Russia-Ukraine crisis having exacerbated already tight metals markets, the focus was on supply chain management, cost pass-through and fears of demand destruction. Security of supply is materialising as a key driver of metals markets keeping prices higher for longer. What have we learnt from the Miners? Margins are expanding, with metals markets tight on the ground, and the Russian-Ukraine war adding disruption to some. Two years of pandemic have made miners more agile on their supply chains, with cost pressures limited to energy, freight, price-linked-costs and royalties. The message was unanimous across miners that only the conviction of higher long-term prices would motivate a supply response, not short-term spikes. Responsible mining is needed to supply for an even more pressing energy transition than before, but the capex drought looks to prevail in the short term on project lead times, rising political/fiscal risks, ESG and capital discipline constraints. Excess returns will go to shareholders. What have we learnt from the Steelmakers? Steelmakers and distributors are increasingly prepared for a higher-for-longer steel and raw materials price environment as the tragic Russia-Ukraine crisis disrupts two of the world''s largest steel exporters and drives unprecedented supply chain challenges. Management teams remain bullish on demand and focused on passing on surging raw materials costs via price hikes - as reflected in successfully rising metal spreads in both Europe and the USA. While steelmakers are focused on securing new sources of raw materials previously sourced from Russia, we heard only mixed interest in localising supply chains to limit this risk moving forward. Our most/least preferred stocks Glencore (+), Anglo American (+), Norsk Hydro (+), Eramet (+) are well placed on exposure. Upside risk...
RIO ACX OUT1V ERA VOE TKA AAL MT NUE NEM NEM ANTO NDA BOL GMKN VALE FM KCO STLD CLF APAM S32 TMST RS CMC STLC ACX BOL 0I0H CMS ERA 0K9L RS6 1STLD ZS2 VOE
Our commodity price forecasts have been revised (see here) together with estimates for our equity coverage. Following Russia’s invasion, the commodity supply’s outlook features uncertainty. Yes, demand will eventually come under pressure, recent inflation-hit prices lifts are set to hold over coming quarters. Wait, for there will be a better time to sell. Upgrading Rio Tinto, BHP & Endeavour from Sell to Hold; Anglo American to a BUY on PGM and diamonds exposure.
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We give an overview of our sectors and participating companies ahead of our 22-24 March event. The Russia-Ukraine crisis exacerbates already tight metals markets Even if no metal is currently subject to direct sanctions imposed on Russia, logistics are disrupted, bank financing / insurance has become harder, and importantly many importers / traders have been keen to distance themselves from Russian-origin material on regulatory and reputational concerns. A key risk is energy prices weighing on economic momentum, but China''s disproportionate weight in metals markets suggests the balance will remain tight with more infrastructure spending on its way. Fresh customer concerns on security of supply raise short and medium-term questions The genuinely inelastic nature of supply response in today''s mining amid technical/exploration/fiscal/lead time/ESG challenges was already a threat to the expected pace of energy transition, for which metals are critical. De-risking metal supply chains is bound to emerge as a new imperative for downstream users, with potential for partnerships/MandA. In Steel, the Russia-Ukraine crisis has knocked out two of the world''s largest steel exporters, meaningfully tightening supply/demand balances and disrupting supply chains in Euro and US markets. We believe it will be challenging to find alternative suppliers, supporting sharply higher steel prices. The most burning questions to ask Miners What dislocations to trade flows are you witnessing? Are your customers thinking harder about security of supply? Is this commodity price reaction a signal strong enough to induce fresh capex programmes? What could lead times be? Are miners going to sit tight and enjoy higher prices? The most burning questions to ask Steelmakers How has the Russia-Ukraine crisis impacted your supply chain and cost base for raw materials; do you expect to permanently alter procurement strategies in response? By how much will power costs increase?...
On the back of iron ore market euphoria (even though it normalised in H2 21), and ample support from aluminium and copper, Rio Tinto reported record profitability and shareholder rewards. While various price, cost and/or volume challenges/risks lie ahead, Rio is well-positioned to avert any worrisome performance erosion and at the same time stay committed to its growth and sustainability improvement measures. Hence, our positive stock recommendation is reiterated.
Atlantic Lithium* (ALL LN) / formerly IronRidge* (IRR LN) – Completion of Ricca resources demerger CATL seeking to regain NIO business with new 'ultrahigh' nickel' battery Rio Tinto (RIO LN) – Rio to pause Jadar development after protests
Rio Tinto plc Atlantic Lithium Limited.
Rio’s investors day was focused on two of the most critical mining industry thematics in today’s times, i.e. green and growth. The announced measures couldn’t have materialised at a better time, given the (recent) woes pertaining to governance and the iron ore market sell-off. Remember, considering Rio’s enviable balance sheet strength, it has the flexibility to pursue the targeted plans with rigorously and, at the same time, maintain ‘relative’ shareholder reward attractiveness. Hence, we reiterate our positive stock recommendation.
Our Restocking Indicator has once again upgraded to Buy, but we believe that this too is a false signal. Under normal market conditions – with profitability high and inventories low – China’s steel mills would lifting production rates. However, with a central government cap on output until at least Mar-22, this natural response is unlikely to play out. Indeed, while a seasonal uptick in industrial activity should still occur in 1Q22, the general demand outlook over the next six months is likely to be subdued.
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Yet again, Rio managed to maintain its dividend extravagance. Although, besides mighty iron ore, the exceptional H1 results were partly also driven by aluminium and copper – where normalcy is gathering momentum. With key divisions moving in the right direction, and balance sheet flexibility being put to good use, i.e. rewarding shareholders and pursuing growth – this time via a greenfield lithium investment, Rio remains a promising large-cap mining play. Further re-rating may materialise if governance issues are also addressed effectively.
This past week, we’ve talked with resources sector investors on our latest set of commodity price forecasts (Commodity priceDECK, 29-Jun-21). Popular discussion points include: 1. Chile’s copper tax vs. supply risk; 2. China’s mysterious metal reserves; 3. confusion with iron ore’s price differentials; 4. drivers/duration of Coal’s price rallies; 5. gold price vs. inflation risk; and, 6. ‘what’s that? Ben’s put BHP on a sell?’.
Rio Tinto plc Antofagasta plc
The Restocking Indicator (RI) has remained on the BUY signal for the third month in a row, as inventories still have yet to keep the pace of both domestic and export demand. Given the rise in steel prices globally, the strength in demand comes as no surprise, but inventories, particularly in iron ore appear to have normalised. Expecting a pullback in export demand this coming month as rebates are pulled, which might downgrade the signal, but otherwise the RI would imply this rally has a month left in it and we would play it through Ferrexpo or Anglo American.
Today's news & views, plus announcements from RIO, PAGE, AVON, BOO, GHS
Today's news & views, plus announcements from RIO, CRH, DLG, DOM, TEAM
Despite COVID-19 uncertainties, Rio reported strong 2020 results. Unsurprisingly, the performance was again driven by iron ore – which reported a c.60% operating margin. Although some support was also rendered by aluminium. This helped in maintaining attractive dividends and the continuation of deleveraging. While we still expect iron ore prices to normalise gradually, Rio should remain well-positioned to outperform peers in dividend terms, thanks to flexibility rendered by its fossil-free proposition and the new CEO focusing on the right areas of improvement.
Today's news & views, plus announcements from IMB, RIO, UKW, PLUS, SIG, TRIG, CREO, SUPR
The eight diversified miners under our coverage will report H2/FY20 performance over the next two weeks, with spot prices leaving earnings firmly in upgrade territory. Price-to-profit conversion at its best in calendar H2 2020, in particular for iron ore In H2 2020, miners were able to bring production back on, after many operations were suspended in Q2 during the worst moments of the pandemic. Some costs were also removed and productivity gains surprised on the upside. Meanwhile, the prevailing macro Goldilocks scenario has kept pushing commodity prices higher. Iron ore has been in a particularly sweet spot, with Vale (+) eventually delivering a flat year for production, whereas Chinese imports broke new records: the last time Iron ore EBITDAs were seen at these high levels was in 2014, and 2010 before that. This part of the recovery is the one when prices take off leaving cost inflation behind, initially. Investors will be asking for guidance on unit cost going into 2021 as forex is starting to move the other way, visible in the AUS/USD. Energy costs are also on the rise. Royalties are taking their toll too. The most difficult question will be capital allocation, or maybe not: just pay more dividends Operating cash flow in aggregate across our coverage (diversified and pure plays) would reach USD119bn in FY21e on our central case, with USD35bn available for dividends. Last time OpCF topped USD110bn was back in 2010-11, but large capex plans then left USD15-25bn for dividends. With almost all balance sheets in very strong shape, management teams have to ask themselves how to make best use of the excess cash being generated. Some capex have been deferred and need to take place this year. The ESG/energy transition will need some investments too. Now may also be a good time to offload some legacy assets. While macro visibility is not yet totally de-risked, and the window for cash MandA may have been missed, dividends look like a safe...
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Today's news & views, plus announcements from RIO, BBOX, TATE, WKP, KWS, JOUL, GSEO
Today's news & views, plus announcements from RIO, EXPN, BLND, GLEN, PFD, HMSO, WG, WJG, HOTC, KAPE, QTX, BOOM
Today's news & views, plus announcements from RIO, TSCO, WIZZ, SVS, BBOX, EMAN, POLR, BRK, BOO, THG
The signal for our Restocking Indicator has strengthened as China’s domestic demand improved and inventories of finished materials contracted even faster this month, delivering a buy recommendation for the second month in a row. We believe that the current signal is better corroborated by other near term indicators than last month’s, particularly as seaborne iron ore supply has tightened a notch, and would recommend Anglo American and Ferrexpo on a one-month view.
In these five short videos we outline our sector view of the key commodities and the major mining companies for the next six to twelve months ahead. Whilst we are incrementally more bullish on the short term outlook, because of stronger than expected Chinese credit growth, we are still downgrading Rio Tinto to SELL, and Antofagasta, KAZ Minerals to HOLD on valuation grounds and upgrading Anglo American to a BUY
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Our Restocking Indicator is back on a Buy signal for the third time this year, as inventories of steel remain relatively low versus orders and inventories of raw materials. Whilst the Restocking Indicator has had 100% accuracy year to date, we would caution any outright bullishness, given it does not reflect changes in global macro sentiment or changes in iron ore supply. We would recommend a pair trade of short Rio Tinto, long Anglo American.
In this presentation we outline our sector view of the key commodities and the major mining companies for the next six to twelve months ahead. Whilst we are incrementally more bullish on the short term outlook, because of stronger than expected Chinese credit growth, we are still downgrading Rio Tinto to SELL, and Antofagasta, KAZ Minerals to HOLD on valuation grounds and upgrading Anglo American to a BUY. We are picking value where we believe market has overestimated price support in iron ore and underestimated it in PGMs. We are broadly neutral on copper and coal at current spot prices and caution reading too much into the recent diamond recovery.
RIO GLEN AAL ANTO KAZ FXPO
RIO TINTO^ (RIO, NR, CNP) – Q3’20 production essentially in-line, FY20 production guidance largely reiterated, cost guidance maintained | SALT LAKE POTASH^ (SO4, NR, CNP) – Mid-Oct’20 deadline for meeting debt conditions missed; now targeting Nov’20; Taurus gets A$0.75m of shares for extension
Rio Tinto plc Salt Lake Potash Limited
The iron ore producers continue to enjoy abnormally high prices, driven by seemingly insatiable Chinese import demand, that are driving large upgrades to consensus this year and next. However, we fail to see what could justify Chinese steel demand upgrades in 2021 and beyond, when infrastructure and real estate investment already appear to be slowing. Seaborne supply is in full swing, but scrap is set to recover on better prices. Rio Tinto is pricing in $92/t iron ore for 2021, but we see little fundamental support at that level. Maintain HOLD sector ratings but with a view to downgrade Rio Tinto, once our short-term indicators turn.
Amid the heritage cave blasts controversy, Rio Tinto announced that its CEO will be resigning and there would be other key management exits. It’s clear that the mounting external pressure hasn’t left many options. While JS’s exit is a near-term blow, this development perhaps sets the ball-rolling for Rio’s ESG momentum – which has been missing so far. Fortunately, the group’s is well-positioned to invest in a robust governance structure and, hence, do away with the only scar left in its recovery story.
Our Restocking Indicator is back on a BUY signal following its second strongest reading on record. Despite the continued contraction in both new domestic and export orders, finished goods inventory levels are contracting faster and the restocking demand impulse will continue in the short term. Iron ore equities could go higher still, but we believe they are likely to de-rate further on stronger spot prices. We remain pessimistic on iron ore prices on a six-month view as the market loosens, but on a one-month view, we maintain a Hold recommendation on the sector.
Rio delivered a decent set of H1 results, especially considering the COVID-19 disruption. Once more, Iron ore single-handedly came to the group’s rescue and (largely) compensated for varying issues in other divisions, thereby facilitating $2.5bn of dividends. While we don’t expect a magical near-term turnaround in the troubled divisions, iron ore’s sustained resilience should provide healthy comfort – also from a dividend perspective. Hence, Rio remains our preferred diversified mining bet.
RIO TINTO^ (RIO, NR, CNP) – Q2’20 production in-line, FY20 guidance reiterated; second COVID-19 wave seen as key threat
RIO TINTO^ (RIO, NR, CNP) – Updated Oyu Tolgoi feasibility study sees reduced reserves, confirms timeline and cost blowouts | TRIDENT RESOURCES^ (TRR, NR, CNP) – Renamed ‘Trident Royalties’; trading under new name from Mon 6th July 20; ticker unchanged
Rio Tinto plc Trident Royalties Plc
RIO TINTO^ (RIO, NR, CNP) – Updated Oyu Tolgoi feasibility study sees reduced reserves, confirms timeline and cost blowouts | TRIDENT RESOURCES^ (TRR, NR, CNP) – Renamed ‘Trident Royalties’; trading under new name from Mon 6 th July 20; ticker unchanged
Our Restocking Indicator has returned to a Hold signal after being on a sell for only one month following its weakest reading. The upgrade in the signal was driven by the inventories of steel at mills contracting faster than that of raw materials.
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We had been bearish on BHP, Rio Tinto, Anglo American and Ferrexpo, because we expected the iron ore and coking coal price to collapse. They have not, but the share prices have plummeted anyway.
Iron ore yet again proved to be Rio’s biggest strength – accounting for 90% of 2019 profits. However, the group is yet to capitalise and deliver in high-potential aluminium and copper. Given Rio’s material Chinese business exposure, the Coronavirus uncertainty should be another (big) burden. Fortunately, the group’s balance sheet strength and absence of coal exposure (unlike peers) should be helpful in withstanding the on-going difficulties/uncertainties.
Good FY19 results RIO reported EBITDA of $21.2bn (+17% YoY, consensus $21.0bn) and underlying earnings of $10.4bn or 636cps (consensus $10.4bn or 629cps, INVe 620cps). Iron ore FCF was $9.6bn; RIO’s total FCF was $9.2bn. The final dividend of 231cps took the FY DPS to 443cps (cons 452cps), including the special dividend of 61cps in 2H. FY19 dividends totalled $7.2bn direct, a 70% payout and a record quantum for the company. ROCE was a sector leading 24%. After capex of $5.5bn, RIO ended the period with net debt of $3.7bn (cons $4.9bn), down from the last reported $4.9bn (pro forma $5.2bn). Consensus was forecasting a 15% drop in earnings in FY20, with EBITDA of $18.5bn, EPS of 534cps, DPS of 331cps and RIO to end the year with net debt of $5.1bn (INVe $3.4bn). As a gauge of leverage, a $10/t lower forecast iron ore price (to $75/t) would lower our FY20E EPS by 16%. Key points from presentations and roundtable Climate change strategy. RIO has made several climate change-related targets, including 15% lower absolute emissions by 2030, part of a larger TCFD document announced today. To this end, it has allocated $1bn of climate-related spend over the next 5 years (could be opex or capex), stating that all such expenditure will be rational and economically defensible. M&A. While RIO has stated before that M&A transactions destroy value, it has looked at more than 200 M&A opportunities in the past 3 years. First focus has been on lithium (cf. RIO’s existing exposure: Jadar and Boron (lithium by-product)) and then on battery grade materials (copper, nickel). PGMs are also of interest, but not in South Africa. Any opportunity must be for value, must be lowest cost, meet IRR hurdles and be in an attractive jurisdiction. Clearly a tall order, perhaps why RIO’s first preference for growth is organic. Coronavirus. RIO expects a Q1 impact, with recovery dependent on the rate of normalisation. Chinese stimulus is currently through freer credit, likely to be more direct (infrastructure, construction) from Q2. Steelmakers being limited by inputs such as flux, scrap, while domestic iron ore producers likely to be off 5-10mt from forecast 260-265mt rate (62% equivalent). Winu. Targeting first production in 2023, which would be a 5-6 year time from discovery. While this is an aggressive timetable, particularly given environmental permitting, it is not impossible, in our view, given RIO’s well established presence in the Pilbara. OZ Minerals’ Prominent Hill project took 6 years from discovery to production, in a remote area in South Australia.
Lithium has had a dismal couple of years and prices are now back at levels seen before the first wave of enthusiasm for battery materials. Demand has been disappointing, particularly out of China because of the slump in electric vehicle sales and supply from hard rock producers in Australia came on too quickly.
Rio Tinto plc Millennial Lithium Corp.
China has done it again, smashing records for steel consumption and real estate construction, and in the process gifting the iron ore miners staggering profits. The consumption trends and our lead indicators would suggest that the good times will continue in the short term.
Rio Tinto held a rare Investor Seminar today, with presentations by several members of the executive team. While the presentations were strictly scripted, and the Q&A gave very little away in terms of new information, the seminar highlighted that the company is firmly back to its roots: conservative, disciplined, focussed on generating cash and delivering shareholder returns. Boring at its best, as RIO always should be. Not just about digging dirt. RIO highlighted the greater complexity and increasing global challenges facing the industry in the next decade, driven by growing geopolitical tensions (trade and GDP growth), higher societal expectations (ESG/climate change) and technological disruptions. The company states that the best way to tackle climate change is by working across the entire value chain, from the iron ore/bauxite mine to the automaker. To this end, it will continue to develop partnerships such as the one recently announced with Baowu and Tsinghua University. RIO noted that 71% of its electricity consumption comes from renewable sources and that it has reduced its own emissions by 18% in the past 5 years. This includes sourcing renewable power at Kennecott (vs coal powered previously), thereby reducing the operation’s carbon footprint by 60% while improving community relations, given the winter inversions regularly experienced in nearby Salt Lake City. No growth for growth’s sake. In the last 3 years, RIO has grown volumes at a c.2% CAGR but future growth remains captive to the company’s value-over-volume mantra. RIO admits that it doesn’t know what the perfect mix of commodities in the future will be, but that it doesn’t allocate capital based on what it wants the product mix to be, but on what offers the best returns: making money drives the decisions, within a background of looking at all options. Technology now reaping rewards. While several companies are advocating their technological expertise, RIO believes its mine automation system is a competitive advantage, given that much of the knowledge has been kept in-house and so cannot be bought off the shelf or replicated easily. AutoHaul, for example, has taken many years to implement and refine. In order to encourage new technology adoption at assets, the company is conducting more trialling and small scale implementation, to de-risk new technology. Focus still very much on iron ore. RIO is iron ore centric and unapologetic about this. And why should it be, given that the division has returned EBITDA margins of over 50% for the past two decades? We highlight key points on iron ore in this note. Continued overleaf
In this week’s edition of Liberum's Podcast - Best Idea of the Week, Ed Blair, Head of Product Strategy talks to Mining Analyst Richard Knights. They discuss the iron ore market and how it's perfectly set up for a sharp fall in the next six months.
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Even though iron ore prices have weakened materially since July 2019, Rio Tinto remains well-positioned to generate healthy cash flows and maintain its shareholder reward attractiveness.
China's steel PMI data in August was poor with the headline survey estimate falling to 44.9 from 47.9 and has taken our Restocking Indicator to a Sell signal. Output surprisingly expanded slightly after two months of contractions, despite the previous demand weakness, and now new orders has then subsequently fallen even further to 37.5.
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Mining Update, AMS, Osram, Market Highlights
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The July Chinese data dump confirmed the out-of-cycle rally in Chinese property construction has likely peaked and along with it, iron ore demand. Iron ore is the only one of the four major commodities to still be trading well above its cost structure and we see limited price elastic supply above $50/t.
Given the rapid moves in commodity prices over the past week we thought it worth re-visiting our earnings momentum models, which interestingly now show the mining sector now back in marked-to-market (MtM) downgrade territory vs. consensus for the first time since January this year (using aggregate earnings).
RIO AAL GLEN BHP
Thanks to material iron ore price tailwinds, Rio Tinto managed to deliver a healthy set of H1 results, despite various other issues. Moreover, by leveraging its balance sheet, the group announced record interim dividends of $3.5bn. While iron ore is (and is likely to remain) a cash cow, all eyes are now pinned on how the copper and aluminium divisions perform/recover in the coming years. After a strong ytd run-up, buying on (macro-driven) share price corrections should be apt entry opportunities.
Restocking indicator back to HOLD after 4 consecutive BUY readings
Signs China's construction cycle could be rolling
Chinese data is (rightfully) heavily scrutinised by investors. Steel data in particular has been the source of much controversy, most recently due to the strength of apparent crude steel consumption in 2018 (+8%), as demand for end-demand items such as housing and key durable goods declined.
Despite a continued slowdown in new orders, our Restocking Indicator delivered its fourth consecutive BUY signal over the weekend at 1.13 (>1.1 = BUY).
Chinese port stocks of iron ore have fallen by c.30mt over the past three months at the same time as prices have added c.$30/t, closing last night at close to cycle highs at $110/t. The analysis we presented in our May sector presentation, highlighted around a third of the growth in China's record steel production over the past 12 months has been fed by destocking of unseen iron ore inventories across the supply chain within China.
Chinese steel prices spike, iron ore premiums lagging
Further downward revisions in iron ore supply from BHP and Rio this week, combined with a stronger than expected manufacturing PMI print has seen the mining sector rally again, now to its highest level since H2'11. The 10% rally since mid-March has been largely an equity re-rating, with commodity prices and Big-4 earnings momentum tracking sideways despite the optically positive demand and supply news.
As the slowdown in the Chinese housing market has become more apparent over the past couple of months, we've seen increasing newsflow around the overbuilding that occurred during the latest credit fueled construction surge in China. In February the Nikkei Asian Review published an article highlighting a study by the Southwestern University of Finance and Economics in Chengdu, whichcalculated 21.4% of China's housing stock was empty, or 65 million empty apartments.
We've updated our seaborne iron ore supply model following the closure of Vale's Timbopeda mine on Friday, which is the fourth incremental hit to seaborne supply following Vale's initial announcement of 40mt of lost production on January 29th. We now see seaborne iron ore production down 24mt (on a run-rate basis) since the beginning of 2018, but still an iron ore surplus in 2019 based on weak steel demand.
Despite the February print of Total Social Finance missing earlier this week, credit growth in China has rebounded and is running +25% YTD. However lending to households, which was the driver of the last credit cycle and end-demand for the all important property sector, remains subdued (-36% YTD, YoY). Over the past decade, the three credit cycles in China that have stimulated the property sector and driven global steel consumption growth have all involved rapid expansion of household and shadow lending.
Restocking Indicator signals time to SELL majors
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While Rio’s 2018 operating performance was largely stable vs. 2017, the year witnessed major asset disposal benefits. Not only did the group’s bottom-line – supported by disposal gains – hit its highest level since 2010, the full-year shareholder rewards totalled $13.5bn. Interestingly, the on-going disruption in global iron ore markets, removal of US sanctions against Rusal and the restoration of operational normalcy in copper should provide further impetus to near-term earnings, thereby helping Rio to maintain its overall attractiveness.
This morning's China steel PMI data has delivered a sharp improvement in our steel restocking indicator signal to BUY (from HOLD). Given the continuation of weakness in Chinese credit, the slowing housing market and weak appliance output the rebound is surprising, but may reflect restocking ahead of Chinese New Year, particularly given the flat to weak readings in November (0.85) and December (0.99).
H1 performance, even though healthy, was fairly stable (both yoy and hoh). Apart from iron ore and aluminium continuing to be healthy profit-generators, some revival in copper was welcome. While the recent sentiment is driven by the optimism around hefty shareholder rewards, revival of the capex cycle might soon come to the fore. Nevertheless, Rio is one of the best positioned miners to withstand most uncertainties and, hence, remains one of our preferred bets.
Apart from extraordinary commodity price tailwinds in 2017, Rio’s cash position also benefited from hefty asset disposals. As a result, net debt slumped to highly comfortable levels, and record dividends and share buy-backs were announced. However, given that iron ore and coal (where an oversupply threat remains) accounted for a disproportionate share of earnings improvements, and copper assets are still failing to attain normalcy, Rio’s profitability and, hence, shareholder rewards are at a risk of falling again.
According to media reports, Mick Davis (ex-CEO of Xstrata, acquired by Glencore in 2013) is speculated to be the top contender for the Chairman’s role at Rio Tinto. Jan du Plessis, Rio’s current Chairman, is leaving the Anglo-Australian miner in 2018 to take up the Chairman’s role at BT Group. Finding his replacement hasn’t been an easy task, with John Varley – Rio’s director entrusted with the responsibility of finding a successor – resigning in June 2017, after he was charged by the UK authorities for alleged wrongdoing(s) during his tenure at Barclays. There is no official confirmation from Rio in this regard.
Rio Tinto reported healthy H1 17 results, with support coming from all divisions, except for copper. Sales were up 25% yoy (and 5.7% hoh) to $19bn, with iron ore and coal being the biggest beneficiaries of the pricing euphoria. Similar to peers, profit improvements were stellar, with adjusted EBIT galloping 163% yoy (and 61% hoh) to $6.5bn – wherein pricing improvements along with continuation of cost optimisation clearly dwarfed the impact of weak volumes, high inflation and energy costs, and unfavourable forex movements. In fact, Rio managed to achieve its $2bn cost improvement target for 2016-17 a good six months ahead of schedule. However, copper continued to remain in a tight spot – impacted by lower grades at Oyu Tolgoi, no contribution from Grasberg due to issues with the Indonesian government related to new mining regulations and the strike impact of Escondida (which affected Rio’s income from associates and JVs). Net attributable profit, even after forex losses of $455m (though much behind our estimates), came in at $3.3bn (+93% yoy; +14% hoh). Mirroring the operating improvements, even reported OCFs came in much stronger (+95% yoy; +21% hoh) at $6.3bn, which along with conservative capital spend of $1.8bn helped further reduce (19% vs. 2016 end) net debt to $7.6bn. H1 also witnessed the Australian thermal coal asset sale finally coming to a closure, after a fiercely fought bidding war between Yancoal and Glencore. Post a series of counter offers, Rio finally decided to go ahead with Yancoal’s offer of $2.7bn, – o/w $2.45bn would be payable in cash on completion while, out of the remaining $240m of unconditional royalty payments, $200m would be received before 2018 end. Management expects this transaction to close during Q3 17. Taking into consideration the strong operating performance, which would be further supported by the Australian thermal coal asset sale proceeds, Rio announced a record interim dividend of $1.1 per share. Furthermore, after announcing a $0.5bn share buy-back programme in February 2017, the group announced another $1bn of buy-backs. Management guides 2017 capex of $5bn, followed by $5.5bn in both 2018 and 2019.
Rio Tinto’s FY16 operating results (i.e. group-level sales and underlying operating profit) came broadly in line with AV’s estimates, with material improvements achieved in H2 16. However, the announcement of lucrative dividends (and buy-backs) and the reversal of hefty forex losses on external debt were major surprises. Reasonable ‘group’ operating performance… H2 and FY16 sales were $18.3bn (+8.5% yoy; +18% hoh) and $33.8bn (-3% yoy), respectively. Commodity prices continued to recover in H2 (iron ore and met coal in particular), which along with healthy volumes resulted in pronounced sequential sales growth. However, the full-year top-line was impacted by below par copper operations and material aluminium (premia) weakness, more than offsetting the volume-driven resilience in iron ore. Adjusted operating profit came in at $3.8bn (+47% yoy; +45% hoh) and $6.5bn (+2.4% yoy) for H2 and FY16, respectively, with a full-year operating margin of 19.2%. The full-year (pre-tax) cash cost improvements (well spread across segments) amounted to $1.6bn (o/w $0.6bn were realised in H1). Clearly the operating disappointments of H1 were more than compensated for in H2. However, we were surprised with Rio reporting $611m of forex gains on external debt and intragroup balances in FY16 vs. average annual losses of >$3bn during FY13-15. H2 reported net income came in at $2.9bn (vs. $1.7bn in H1 FY16 and a loss of $1.7bn in H2 FY15) while the full-year figure was $4.6bn vs. a loss of $866m in FY15. Handsome shareholders’ returns Citing the material recovery in the bottom-line, Rio announced a full-year dividend of USc170 per share, though down 21% compared with FY15. This payout was much higher than management’s earlier commitment of a minimum dividend of USc110. A $0.5bn share buy-back (of the PLC shares) was also announced. Despite the profitability resilience, reported OCFs were down (10% yoy) to $8.5bn as working capital efficiencies (sizeable in the earlier years) reversed in FY16. Yet, a combination of conservative capex (-36% of $3bn) and asset sales helped net debt reduce (29% from FY15-end) to $10.2bn. Management guides for aggressive capex of $5bn and $5.5bn (of which sustaining capex would be c.$2bn) during FY17 and FY18, respectively.
This Morning’s News Rio Tinto (RIO LN)
Rio Tinto (RIO LN) has released strong production results for Q3 2016. Iron ore production was up 2% YoY and 3% QoQ to 83.2mnt, however, we note a 5% YoY and 2% QoQ decline in shipments due to rail maintenance. This is likely to impact 4Q 2016 also as shipment guidance has been reduced for iron ore to 325-330mnt for the full year. Met coal production was up strongly, 17% YoY and 21% QoQ to 2.18mnt, due to outperformance at the Kestrel mine. Thermal coal production was down 2% YoY and up 4% QoQ to 5.4mnt due to planned mine sequencing at Hunter Valley.
Rio Tinto posted disappointing H1 16 results. Unlike Anglo American, Rio failed to capitalise on a material rebound in commodity prices since the beginning of this year. H1 sales were $15.5bn (-14% yoy; -8% hoh) as prices continued to more than offset the benefit of strong volumes (except for copper). Adjusted EBIT remained weak (-48% yoy; +1.6% hoh), coming in at $2.6bn and resulting in operating margins of 17.1% (vs. 18.2% in 2015), nowhere comparable to the 39% in 2011. Barring a minor uptick in the energy (coal) division’s earnings, all other commodities (copper in particular) continued to witness profitability pressure. Even $560m of cost savings (out of $1bn targeted for 2016) and $241m of currency benefits failed to end the operating misfortunes. Also, with long-term coal fundamentals in muddy waters, Rio took a $709m provision pertaining to its contractual use of the Abbot Point coal terminal and its rail capacities. However, the bottom-line situation was slightly better – with a net attributable profit of $1.7bn vs. $806m in H1 15. This support came from $558m of derivative and forex gains (primarily on external debt held in non-USD functional currency companies) vs. a $1.3bn loss in H1 15. An interim dividend of 45 US cents per share was announced. Even though this dividend was down 58% yoy, this marks the beginning of Rio’s adoption of a rational (payout-based) dividend policy. Cash flows too remained tepid with reported OCFs falling 27% to $3.2bn. Yet, the group’s net debt was reduced by 4.4% to $13.1bn, which was supported by: 1/ 47% lower capex of $1.3bn; and 2/ $617m proceeds from the Bengalla coal JV divestment. While management has maintained its 2016 capex guidance of $4bn, the spending plans are set to get aggressive in 2017-18, with a targeted annual spend of $5.3bn. Illustrated below are Rio’s key growth investments. Source – Investor Presentation H1 2016 results
Rio Tinto (the world’s second largest miner by market capitalisation) too has fallen prey to the ensuing commodity market downturn. Not only have its profits slumped below the lows of 2009, the group has now been compelled to do away with its progressive dividend policy. *Abysmally weak prices dwarf strong volume ramp-up* Sales: H2 15 – $16.8bn (-28% yoy; -6.3% hoh); 2015 – $34.8bn (-27%; 0.9% behind AV estimates) Lower prices have alone had a top-line impact of >$13bn in 2015, thereby completely overshadowing healthy production volumes (especially of iron ore in H2). Unfortunately, no commodity in Rio’s basket has been spared from the pricing carnage – with iron ore down 43% in 2015 – followed by copper (-20%), met coal (-19%), thermal coal (-16%), and aluminium (-14%). *Impairments and forex losses aggravate profitability woes* Adjusted EBIT: H2 15 – $2.6bn (-56%; -30% hoh); 2015 – $6.3bn (-51%; 14% behind AV's estimates) Despite $1.3bn of cash cost improvements (with $6.2bn of savings achieved since 2013), gains from weaker producer currencies (+$2bn) and lower energy costs (+$359m), profitability has been pushed to record lows. The worst impact has been on iron ore (Rio’s most profitable business) where 2015 EBIT has plummeted 51% to $6bn. These woes have been further amplified by $2.8bn of asset impairments (primarily on the intangibles associated with Simandou iron ore – the world’s largest untapped reserve) and $3.6bn of forex losses (mainly on the US dollar debt held at subsidiaries). As a result, H2 net attributable loss stood at $1.7bn (vs. a profit of $2.1bn in H2 14 and a profit of $806m in H1 15), while the full-year net loss came in at $866m (vs. a profit of $6.5bn in 2014). Additionally, $2bn of losses (primarily on currency translation) in the statement of comprehensive income further eroded shareholders’ equity. *Reality check for dividends* Despite $1.5bn of working capital release (similar to 2014), reported OCFs also tanked 34% to $9.4bn in 2015. Even though capex (down 43% to $4.7bn vs. the peak of $17.6bn in 2012) has been reined in aggressively, the burden of $6.1bn of dividends and buy-backs resulted in net debt increasing 8.3% to $13.7bn. While full-year dividends have been kept flat at $2.15 per share (+6.1% in pence terms), its sustainability was highly questionable with commodities failing to find a bottom. As a result, Rio’s progressive dividend policy has been replaced with an earnings-based policy – targeting a 40-60% payout of underlying earnings over a business cycle. However, the management has committed to a full-year dividend for 2016 of at least $1.1 per share. In the meantime, bare minimum capex is being proposed for 2016 ($4bn), 2017 ($5bn) and 2018 ($5.5bn). While another $2bn of cost savings are being targeted through 2017.
Metal Tiger (MTR LN)– Update on Option over Semenovsky Gold Tailings Project | North River Resources (NRRP LN)– Drilling results from the Namib lead/zinc project | Rio Tinto (RIO LN)– Feasibility study on Simandou to be presented in May
RIO NRRP MTR
Full year Fe ore shipments of 337mt met guidance provided by Rio Tinto (RIO) with Q4 putting in a strong showing of 91mt shipped for a gain of 11% YoY. Copper and titanium slag were the only falling production commodities YoY with results of 505kt, down 16% and 1.1mt, down 25% respectively, in an otherwise relentless rise in bulk commodity output from the firm. Hard coking coal production was up 11% YoY to 7.9mt and aluminium rose slightly to a full year output of 3.3mt. Exploration expenditure fell 25% YoY to US$576m.
Rio Tinto (RIO LN) has announced the signing of a US$4.4bn project finance deal for the underground mine development of its Oyu Tolgoi copper mine in Mongolia. A debt cap of US$6bn was agreed to allow for contingencies. However, there remain a number of hurdles with permits, a further feasibility study as well as final board approval all outstanding. Given the challenges that RIO has encountered progressing the project to this stage we do not rule out further delays.
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A China-induced commodity market crisis has engulfed all miners globally and Rio Tinto – despite being extremely competitive in its operations – has been no exception. Rio reported weak H1 15 results on the back of its hefty iron ore exposure. Top-line plummeted 26% yoy to $18bn, thanks to a 46% correction in iron ore prices, followed by weakness in thermal coal (-17%), met coal (-14%) and copper (-14%) prices. Only the aluminium price was up 2%, but there again prices (along with premia) had started retreating in Q2. The profitability impact was even worse, with an adjusted EBIT of $3.7bn (-47%), which completely overshadowed the $641m of (pre-tax) cost improvements and $847m of (post-tax) exchange rate benefits from depreciating producer currencies (AUD and CAD down 14% and 11%, respectively). Other losses (dominated by $1.4bn of forex losses on external debt and intragroup balances) magnified Rio’s woes, which translated into a paltry net profit of $806m vs. $4.4bn in H1 15. Further down, $1.3bn of currency translation losses (offset by some actuarial gains) culminated into an half-yearly total comprehensive loss of $247m – the worst since H2 12. Reported OCFs were down 19% to $4.4bn (despite a working capital release of $30m vs. use of $795m in H1 14) and capex was also down 35% to $2.5bn. Still, net debt inched higher (+8% hoh) to $13.7bn – reflecting FY2014 final dividend payments and share buy-backs. Nevertheless, adhering to its progressive dividend policy and defying the macro-economic realities, Rio announced an interim dividend of USc107.5 per share (+12%). Management increased its FY2015 cost savings target to $1bn, after 85% of its initial target of $750m was realised in H1 15 itself. At the same time, 2015 and 2016 capex guidance was reduced to $5.5bn and $6bn, respectively, versus $7bn per annum initially.
Still bearish of the sector as a whole and am happy reo remain short but some key supports are nearing which would make good levels to be looking to reduce shorts
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