ii view: Rio Tinto’s iron ore forecast for 2022 underwhelms

Pushing sustainability issues and with a dividend yield of over 6%. Buy, sell, or hold?

Full-year 2021 production update

• Iron ore production down 4% 
• Copper production down 7%
• Aluminium down 1%

Guidance:

• Pilbara iron ore shipments for 2022 of between 320 and 335 million tonnes, from 322 in 2021

Chief Executive Jakob Stausholm said:

"In 2021 we continued to experience strong demand for our products while operating conditions remained challenging, including due to prolonged Covid-19 disruptions. Despite this, we progressed a number of our projects, including the Pilbara replacement mines, underlining the resilience of the business and the commitment and flexibility of our people, communities and host governments.”

ii round-up:

Diversified miner Rio Tinto (LSE:RIO) expects 2022 iron shipments of between 320 million to 335 million tonnes (mt) compared to 322 mt made in 2021. 

That’s marginally below analyst estimates, hindered by management’s expectations for tight labour market conditions and production delays from its new greenfields mine at Gudai-Darri, Western Australia.

Rio shares drifted marginally lower in UK trading, having gained more than 70% since pandemic market lows in March 2020. Shares for rival and the largest miner listed on the UK stock market BHP Group (LSE:BHP) are up by close to 120%. Copper miner Antofagasta (LSE:ANTO) is up around 130%. 

Rio’s iron ore production for 2021, used in the making of steel, fell 4% compared to 2020, hit by factors including above average first-half rainfall. 

Mined copper production for the year fell 7% to 494 kilo tonnes (kt), hindered by Covid-19 disruption. Production over 2022 is forecast by management to come in at between 500 kt and 575 kt. 

Analysts estimate that this update will mean full-year adjusted earnings (EBITDA) coming in 2% below its previous forecast. 

During 2021, Rio established several partnerships to accelerate the decarbonising of its business. One such joint venture with Alcoa (NYSE:AA) and using new technologies will produce aluminium without any direct greenhouse gas emissions.

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Annual results for 2021 are scheduled for 23 February. 

ii view:

The 1995 merger of RTZ and CRA form the foundations of today’s company. Its largest product by sales is iron ore, followed by aluminium and copper. It has strong presences on the ground in both Australia and North America, although it is located across more than 30 countries. China is by far its biggest market, generating nearly 60% of 2020 sales. Rio is looking to grow in copper by developing the underground resource at Oyu Tolgoi in Mongolia. 

The current chief executive took over following the previous head's resignation after the miner previously destroyed a sacred cave complex in Western Australia, raising Environmental, Social and Governance (ESG) concerns. It is now working to rebuild the trust of the Aboriginal people. A climate change strategy and target to reduce absolute company emissions also feeds into today’s ESG policies. 

For investors, commodity demand is tied to economic growth, making the industry cyclical in nature. The weather can impede operational performance, while disruption from the pandemic persists and ethical issues more so than ever now warrant consideration.  

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That said, exposure to expected long-term Chinese economic growth remains. Its focus on shareholder returns and payments of both ordinary and special dividends over recent years is a key attraction. A historic dividend yield of over 6% is still highly attractive in the current ultra-low interest rate environment, and the relatively new chief executive is attempting to address ethical issues. For now, and despite some operational headwinds, Rio looks to remain worthy of ongoing long-term investor support. 

Positive

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

Negative

• Uncertain global economic outlook
• Subject to matters outside of management’s control such as the weather

The average rating of stock market analysts:

Strong hold