ii view: Rio Tinto flags favourable production in Q4

Fourth-quarter production update to 31 December

• Australian Pilbara iron ore shipment of 85.7 million tonnes (mt), up 1% from Q3

Guidance:

• Continues to expect full-year 2025 Australian Pilbara iron ore shipments of between 323 to 338 mt

Chief Executive Jakob Stausholm said:

"We remain focused on executing our strategy to deliver attractive shareholder returns and build a stronger, more diversified, and growing business, driven by our confidence in the long-term demand for materials essential to the global energy transition."

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ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today detailed quarterly demand for its biggest profit generating commodity iron ore, broadly matching City estimates but with copper production exceeding expectations. 

Fourth-quarter shipments of Australian Pilbara iron ore rose 1% from the previous quarter to 85.7 million tonnes (mt), with full year shipments down 1% to 328.6 mt and against the backdrop of a difficult Chinese economy. Copper production, and aided by the ramp up of operations in Mongolia, rose 21% in Q4 from the previous quarter to 202 kilo tonnes (kt) and by 13% on an annual basis to 697 kt. That beat City forecasts of around 175 kt for the quarter. 

Shares in the FTSE 100 company rose 1.5% in UK trading having come into this latest news down 10% over the last year. Glencore (LSE:GLEN) is down 16% over that time while the FTSE 100 index has risen 10%.  

Regularly sold to China, Australian iron ore accounts for Rio’s biggest chuck of adjusted profits (EBITDA) at around 70%, with the balance largely split between copper and aluminium.  

Rio left guidance for Australian Pilbara iron ore shipments in 2025 unchanged at between 323 and 338 mt. Total mined and refined copper production is expected to come in at between 780 to 850 kt and potentially up from 2024’s 793 kt, while aluminium output may potentially rise to 3.45 mt from 2024’s 3.3 mt. 

In October 2024, Rio Tinto agreed the $6.7 billion takeover of US listed lithium miner Arcadium Lithium (NYSE:ALTM) in a move aimed at boosting exposure to climate change friendly or energy transition products. Lithium is used to make rechargeable batteries used by products from mobile phones to electric vehicles (EVs). Most of the required government approvals have been received, with the transaction expected to complete before the middle of 2025.  

Broker Morgan Stanley reiterated its ‘overweight stance on the shares, flagging a potential 1% increase to its adjusted profit estimate for 2024 following the update. Annual results are scheduled for 19 February. 

ii view:

Tracing its history back to 1873, Rio Tinto today operates in over 30 countries with strong presences in Australia and North America. Headquartered in London, its rivals include Anglo American (LSE:AAL), Antofagasta (LSE:ANTO) and BHP Group Ltd (LSE:BHP). Copper production, used in batteries and widely across electrical items, is being expanded via the development of its underground resource at Oyu Tolgoi in Mongolia.

For investors, concerns about the economic health of the miner’s biggest customer China, at around 60% of overall sales, persist. The $6.7 billion price for Arcadium was more expensive than the City expected, with success dependent on growth plans through to 2028. The West’s relationship with China is now more strained given its closer tiers with Russia, while safety and employee fatalities industry-wide are not to be forgotten.  

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To the upside, a focus on increasing production of commodities such as copper and lithium used in energy transition across products such as solar panels, wind turbines, and energy storage systems, is ongoing. Rio considered its acquisition of Arcadium as counter-cyclical, with the price of lithium down more than 80% since its peak at the time of approach. Efforts to improve its Environmental, Social and Governance (ESG) policy continue, while balance sheet strength was flagged at the time of the Arcadium purchase, with the deal lifting the group’s net debt to adjusted profit (EBITDA) ratio from under 0.2 times to around 0.5 times. 

On balance, worries regarding China and broader global economic growth cannot be forgotten. That said, a consensus analyst estimate of fair value above £60 per share and a forecast dividend yield of more than 6% arguably provide scope for long-term optimism.   

Positive

• Selection of different commodities mined
• Attractive dividend payment (not guaranteed)

Negative

• Uncertain global economic outlook
• The weather can impact performance

The average rating of stock market analysts:

Buy