Sandstone Insights: Rio Tinto’s earnings hold steady and future growth fueled by major initiatives

ASX code: RIO

Suggestion: Hold

Need to know

• Flat FeO, copper, and aluminium prices, with easing unit production cost pressures
• Capex guidance: US$10 billion per annum from 2024 financial year (FY24) to 2026 financial (FY26), balance sheet gearing currently at 8%
• Major projects at Simandou, Oyu Tolgoi underground, and others poised for growth.

Mid-year earnings in line with expectations

Rio Tinto's 2024 first-half results met consensus estimates. Small movements in commodity prices and reduced operational volatility contributed to a modest increase in earnings for the period. The FY24 guidance remains unchanged.

2024 first-half results

Overview of key financial indicators

• Strong iron ore performance

Iron ore earnings before interest, taxes, depreciation, and amortization (EBITDA) reached US$8.8 billion, up 10% on the prior corresponding period (pcp), with the average realised FeO price up 7.3% on pcp to US$105.8 per dry metric tonne (dmt). Shipments were slightly down due to a train collision in May.

• Future capacity expansion

Rio Tinto's FeO production targets range between 340-360 million tonnes per annum (mtpa), with new Pilbara Minerals mines and the potential Rhodes Ridge mine poised to support over 100 mtpa by the decade's end.

• Significant capex investment

The Simandou iron ore project requires US$5.3 billion (Rio Tinto's share) for the 60 mtpa mine and a 70 km rail spur from the Simfer mine. Port and rail infrastructure developments, including a 552 km heavy rail system, are underway.

• Copper earnings surge

Copper EBITDA for the first half of 2024 was US$1.8 billion, up 67% from last year. The increase is due to significant contributions from the US$7 billion Oyu Tolgoi (OT) underground mine and Kennecott smelter. OT is on track for 500 ktpa copper production from 2028 to 2036.

Unit costs have reduced to 147c/lb (37c/lb) due to increased production at Kennecott. Escondida (Rio Tinto 30%) saw higher feed grades to the concentrator and contributed US$1.1billion to EBITDA.

Beyond existing projects, Rio Tinto has Winu, La Granja, and Resolution copper as potential development options.

• Aluminium sector's strong earnings and production increase

Aluminium EBITDA reached US$1.5 billion, up 38% on pcp, driven by a 1% increase in the aluminium price and reduced key material costs. Key material costs (caustic, coke, pitch) all fell in the period adding to Rio Tintoʼs margin. Bauxite production rose by 10%, increasing shipments to third parties by 13%.

• Mineral segment

Steady mineral performance: Minerals EBITDA was US$687 million, consistent with pcp, despite lower titanium dioxide feedstocks. The borates market is recovering from supply chain issues.

• Diamond segement

Diamond production decreased by 25% year-over-year due to a plane crash.

• Dividend policy update

Rio Tinto has revised its dividend declaration policy to announce dividends in USD, with payments available in USD, AUD, or GBP. The conversion rate will be set seven days before the payment date, with the 2024 first-half dividend paid on 26 September.

Looking ahead: financial strategies and growth expectations

The flat 2024 first-half result does not reflect Rio Tinto's future earnings potential. With high-quality projects and a full capex bucket, there's a promising runway for growth. Operational cash flow remains robust, and the balance sheet is lean with scope for capital management.

Rio Tinto projects a 3% annual increase in copper equivalent production through to 2028 and likely beyond. Earnings remain most sensitive to changes in iron ore prices, as a 10% change is worth US$2.6 billion. Followed by aluminium and the AUD/USD exchange rate, with a 10% change worth US$1.2 billion and US$752 million respectively. Copper is similar but will increase over the next few years as OT really gets going.

Market valuation and investment potential

Trading at around 5x EV/EBITDA, similar to BHP, Rio Tinto aims to double its copper exposure by the decade's end. With a net dividend yield around 6%, the stock is underappreciated but may require a rise in commodity prices for substantial price appreciation.

EV/EBITDA at low end of range

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}