ii view: Rio Tinto iron ore shipments hit by China

This mining giant has underperformed the FTSE 100 index year-to-date but offers an attractive dividend yield. Buy, sell, or hold?

Second-quarter production update to 30 June

• Iron ore shipments of 79.1 million tonnes, down 4% from Q1

Guidance:

• Now expects full-year iron ore shipments at upper end of its existing 320 to 335 million tonne range 
• Cut full-year refined copper shipment estimate by 10% to between 160 and 190 million tonnes

Chief Executive Jakob Stausholm said:

"We continued to take disciplined measures to grow in the materials the world needs for the energy transition, also with investments to expand our low carbon aluminium production and underground copper production at Kennecott.”

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ii round-up:

Mining giant Rio Tinto Registered Shares (LSE:RIO) today cautioned on global economic growth as China’s reopening and recovery from the pandemic fell short of expectations.  

Second-quarter iron ore shipments, accounting for around three-quarters of Rio's profit, fell 4% from the first quarter to 79.1 million tonnes, with prices received falling given a Chinese property market downturn and persistant consumer caution. 

Shares in the FTSE 100 miner fell around 1% in UK trading having come into this latest news down just over a tenth year-to-date. That’s similar to fellow Australian iron ore and diversified miner BHP Group Ltd (LSE:BHP) and in contrast to a near 2% gain for the wider FTSE 100 index. 

Located across more than 30 countries and with strong presences on the ground in both Australia and North America, Rio generates more than half its sales from China. 

Despite the quarter-on-quarter fall in iron ore shipments, Rio now expects annual shipments to be at the upper end of its existing 320 to 335 million tonne range, more in line with current City estimates. 

Full-year copper shipments, Rio's second biggest profit generator at around 12%, were marginally reduced, with mined deliveries unchanged but refined shipments lowered to between 160 and 190 million tonnes compared with 180 to 210 million tonnes previously, largely due to US Kennecott production issues. 

Broker Morgan Stanley expects no real changes to profit estimates following the update, reiterating its ‘overweight stance on the shares and flagging Rio as a ‘top pick’. 

ii view:

Tracing its history back to 1873, diversified miner Rio Tinto today employs over 45,000 people worldwide. Outside of iron ore and copper, aluminium is also a significant commodity for the company, accounting for around 11% of adjusted profit. Away from its core China market at just over half of group sales, the US comes next taking generating around 15% of revenues, followed by Japan at just under 8%.  

For investors, commodity demand is tied to economic growth, making mining cyclical in nature, and China’s expected growth emerging from the pandemic has disappointed. The West’s relationship with China is now more strained, costs generally for businesses are elevated, while shareholder returns were previously cut given the cocktail of outlook uncertainties. 

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More favourably, a diversity of commodities is mined in contrast to more focused rivals such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES). Plans to improve efficiency, including using automated vehicles, warrant consideration, a focus on decarbonising materials such as its lithium project in Argentina persist, while efforts to improve its Environmental, Social and Governance (ESG) policy are being pursued. 

For now, and while concerns about economic growth persist, a forecast dividend yield of over 6% (not guaranteed) should at least keep income orientated investors happy. 

Positive

• Exposure to a diverse portfolio of commodities
• Attractive dividend payment (not guaranteed)

Negative

• Uncertain global economic outlook
• Ethical policy concerns

The average rating of stock market analysts:

Strong hold