Rio Tinto: Dominant Iron Ore Division Drives Solid Sales

Strong iron ore sales drove a solid first-quarter fiscal 2023 for no-moat Rio Tinto RIO. The company’s share of Pilbara iron ore shipments, the key driver of its earnings, was about 70 million metric tons, 16% higher than first-quarter fiscal 2022. The increase was driven by 12% higher production in the quarter along with the company drawing down inventory. First-quarter sales are broadly tracking our unchanged 2023 forecast. However, given the usual seasonality in iron ore production and also that Rio’s new 100%-owned Gudai-Darri mine is on track to ramp up to full production of about 43 million metric tons during 2023, our forecast for Pilbara iron ore sales of about 280 million metric tons (Rio’s share) in 2023 could be on the low side if current production levels are maintained. However, it is still early in 2023, so we maintain our forecast for now.

We also maintain our fair value estimate for no-moat Rio Tinto of AUD 107 per share. This reflects our recently updated key commodity assumptions, which were incorporated in our prior update. We continue to expect a reduction in forecast 2023 copper production after a disappointing first quarter. We now forecast 2023 copper production (Rio’s share) of roughly 740,000 metric tons, down from about 810,000 metric tons, reflecting production issues at Rio’s 100%-owned Kennecott copper operations in Utah and its 30%-owned Escondida copper mine in Chile.

Elsewhere, aluminum, alumina, and bauxite production were marginally below our full-year expectations. However, iron ore remains the main driver of Rio Tinto’s earnings, comprising roughly three quarters of our forecast 2023 EBITDA of about USD 25.8 billion. Rio Tinto shares currently trade 6% above fair value.