Rio Tinto (RIO) is a top-tier global miner with a world-class asset base and capable management make Rio Tinto one of the few miners to earn more than its cost of capital through the commodity cycle. Geographic and product diversification give the company relatively stable cash flows and lower operating risk than many of its mining peers. Most revenue comes from the relative safe havens of Australia, North America, and Europe, though operations span half a dozen continents.
Rio reported near across-the-board quarterly production increases for its major commodity categories versus the first quarter of 2014. The most meaningful gains were in iron ore, up 10%, to 57.5 million tonnes; coking coal, up 8%, to 2 million tonnes; and mined copper, up 4%, to 165 million tonnes. Pilbara iron ore expansion progresses on track towards a 330 million tonne per annum target by 2015 versus the current 290 million tonne run rate. Coking coal enjoyed higher output from the Kestrel mine. Copper benefited from improved grades at Kennecott and ramp-up at Oyu Tolgoi.
No change to our £41.65 per share fair value estimate. However we sharply lower our 2014 earnings forecast. While second-quarter production was sequentially higher, iron ore, alumina, and coal volumes were regardless lower than expected. Rio Tinto sold its Clermont mine effective end May for $1.0 billion, which will crimp annual coking coal output by over 10% or more than five million tonnes. Further, plans for a 65-day smelter shut-down at Kennecott from September which will lead to lower copper cathode production and revised alumina production guidance weighs as well.
Even more importantly, we have reduced our 2014 price expectations reflecting weak spot prices in particular for metallurgical coal to $128 per tonne but also for thermal coal to $86 per tonne, aluminium to $0.95 per pound and iron ore to $109 per tonne. The move is exacerbated by the persistently and uncharacteristically strong Australian dollar.
Rio arguably has the best iron ore business in the world, and we remain upbeat on the outlook for capital and operating cost savings. Reduced Pilbara iron ore network expansion capital costs support our narrow economic moat rating.
.jpg)
