Rio Tinto: Iron Ore Key and Sales Still Solid for Now

No-moat Rio Tinto’s RIO 2023 third-quarter sales met our expectations. Its share of shipments from its Pilbara iron ore operations, the main driver of earnings, was roughly 72 million metric tons, 3% above the same quarter of 2022 and 8% higher than the previous quarter. Rio is on track to meet our forecast for 2023 Pilbara iron ore sales of roughly 280 million metric tons (its share), around 4% above last year. We reiterate our forecast for 2023 unit cash costs in the Pilbara of roughly USD 22 per metric ton, modestly up on 2022.

Rio Tinto reiterated sales volume guidance across the board, save a minor downgrade at the Canadian iron ore operations, a relatively small business. We retain our AUD 111 per share fair value estimate, with the shares trading around 6% higher. Rio’s Pilbara iron ore operations account for about 80% of our forecast 2023 EBITDA of roughly USD 25 billion. Assuming a 55% payout ratio, we forecast 2023 dividends of USD 4.50, or AUD 7.14, per share, representing a fully franked yield of about 6% at current share prices.

Overall, we expect earnings to fall one-third to USD 5.34 per share in 2027 from our 2023 forecast of USD 8.15 mainly on lower iron ore earnings due to price. We forecast Pilbara iron ore sales to rise to about 300 million metric tons (Rio’s share) in 2027, a CAGR of about 1.9% from 2023. This is driven by incremental increases from existing mines and development of replacement mines in our five-year forecast period. However, we forecast Pilbara iron ore to fall to around 60% of midcycle EBITDA from 2027. The main driver of the decrease compared with 2023 is our assumption that iron ore prices fall to our long-term or midcycle assumption of about USD 60 per metric ton, about half current spot prices of roughly USD 120.

Copper is the next most important earner and the ramp-up of two-thirds-owned Oyu Tolgoi helps copper account for roughly 20% of midcycle EBITDA in 2027, about double our 2023 forecast. Aluminum is much of the rest.