Rio Tinto Looks Into The Future

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Rio Tinto’s investor seminar outlined near, medium and long term growth plans with a focus on copper, lithium and to a lesser extent, its primary iron ore business.

-Rio Tinto has faith in the energy transition
-Growth in copper and lithium production the focus
-Iron ore awaits the ramp-up of new production
-Capex up, but dividend policy unchanged

By Greg Peel

Rio Tinto’s ((RIO)) 2024 investor seminar presented a mixed message of more muted near-term performance –lower production and higher capex– but a clearer pathway to around a 3% compound annual volume growth rate into the medium and longer term.

Growth will be led by lithium, copper and, to a lesser extent, iron ore. Rio believes it can deliver the growth while maintaining a solid base dividend.

2025 guidance is mixed, UBS suggests. Iron ore shipments flat year on year are below consensus with the mid-term outlook unchanged, while aluminium is performing in line with expectation and copper is also in line with UBS. Not in line, however, with Ord Minnett, who suggests Rio’s copper growth target is -10% below market expectations and provided the key “talking point” of the seminar.

Capex guidance is lifted to -US$11bn for 2025 from -US$10bn. There was no update on unit costs, but management reassured inflation pressures have moderated.

Copper

Copper production is guided to 780-850kt in 2025, up 120-125kt year on year, consistent with the Oyu Tolgoi (Mongolia) underground ramp-up accelerating next year and Escondida (Chile) mining through high-grade ore.

Updates on Kennecott Utah Copper were limited, which was disappointing for Macquarie, and did not answer questions for Citi. The company continues to optimise the mine plan and costs at the site which were impacted by geotechnical challenges, and suggests Kennecott will “normalise” in 2027 when geotech issues are addressed and the 30ktpa-plus underground mine has ramped up.

In Ord Minnett’s view, lower output from Kennecott is the likely culprit for the weaker than expected copper production guidance. Rio now aggregates production guidance to one line for copper, Citi notes, making it difficult to see what the Kennecott geotech impact is for 2025 on the revised mine plan.

The company still targets 1mt of copper production by 2030, up from around 690kt in 2024, mainly from Oyu Tolgoi.

Meanwhile, Rio has agreed to form a joint venture with Sumitomo, which will pay US$399m for 30% of the Winu copper-gold project in the Pilbara. Rio will remain majority owner and operator. The joint venture will complete a pre-feasibility study in 2025.

With regard further M&A in copper, “It is so expensive to buy copper today”, according to Rio’s copper CEO.

Lithium

While copper has been the benchmark base metal since the invention of electricity, it is today considered a “future-facing” metal by the big miners given anticipated demand growth as the world further electrifies. On that theme, where goes copper goes lithium.

Rio has a high conviction on the energy transition which underpins its constructive lithium demand growth outlook of five times growth by 2050. The company plans to build Rincon (Argentina) with a nameplate capacity of 60ktpa lithium carbonate, which is 13% larger than previous guidance and 20% larger than Macquarie’s prior estimate.

The proposed acquisition of Arcadium Lithium ((LTM)) is expected to complete in the second quarter next year. Arcadium’s global operations include facilities and projects in Argentina, Australia, Canada, China, Japan, the UK, and the US.

Combined with its own developments Jadar in Serbia and Rincon in Argentina, the Arcadium acquisition would position Rio Tinto as the world’s number three lithium miner and lift its annual total production of lithium carbonate equivalent to more than 450kt by 2033 from some 75kt tonnes currently.

Yet, Macquarie notes half of the growth has higher uncertainly and relies on successes in greenfield development, key permits (Jadar) and new technologies (DLE expansion). No capex indications were provided.

Goldman Sachs sees the possibility of Rio forming a joint venture with Codelco in Chile that could see it vend its DLE (direct lithium extraction) technology and help fund early-stage project development. Rio sees the potential to accelerate investment in near-term production assets of Arcadium in Argentina and Canada once it has obtained full ownership.

Iron Ore

Rio’s 2025 Pilbara iron ore guidance of 323-338mt is flat year on year and expected to feature an elevated share of lower grade ore (lower cost but lower realised price) to the 65-70mt produced in 2024, which represented 20% of production, UBS notes.

Depletion remains volatile, with -12mt in 2024 lifting to -19mt in 2025 then -5-10mt in each of 2026 and 2027. The start of Western Range in the first half next year, which will require a 12 to 18 month ramp-up to around 25mtpa, and a further volume uplift of some 5mtpa through efficiency gains, help keep guidance flat.

Goldman Sachs continues to think the 80mtpa development of the high-grade Rhodes Ridge deposit has the potential to be significant for Rio’s Pilbara business as it offers accretive blending options as well as lifting system capacity, thereby utilising spare rail and port infrastructure. Goldman believes this will help close the free cash flow per tonne gap with BHP Group ((BHP)) over the medium to long run.

The Simandou project in Guinea, Africa’s largest mining and related infrastructure project, is on time and on budget, but further expansion is unlikely. 2025 volumes will be “minimal”, Morgan Stanley notes, while long-term expansion beyond full project production of 120mtpa is unlikely given infrastructure (port) constraints. Pushing volumes further requires a deep sea port, which would raise capital intensity substantially, according to management.

First ore from Simandou is targeted in late 2025, followed by rail completion in 2026, and port at full capacity in early 2028. Rio aims to reach full capacity of 60mt in late 2028. The implied 36-month ramp-up is faster than Macquarie had forecast, and the broker still sees risk to full system utilisation.

Rio believes the long-term outlook for iron ore is robust, driven by urbanisation and industrialisation of the “Global South”. Management noted there are more than two billion people in countries for which GDP per capita will lift to the level at which economies typically become more steel-intensive.

Management expects crude steel production to grow to 2.1bn tonnes by 2040, from 1.9bn tonnes in 2023, and estimates 40% of supply will need to be replaced over next ten years.

Capital Management

Rio’s capital allocation policy is unchanged. The company aims to maintain a solid ‘A’ credit rating and will return excess cash to shareholders after the base dividend policy of a 40-60% payout, though management has sustained 60% for many years, UBS notes, and would like to maintain this level.

Management would like to have the flexibility to implement a share buyback and will discuss this with Chinalco, which currently owns 14.9% of shares. Rio believes it does “not make economic sense to collapse the DLC” (dual listing company structure UK-Australia) despite shareholder pressure.

Rio does not see the DLC as an impediment to the business and the cost to collapse it is high (more than US$5bn), and most growth going forward is outside of Australia which implies little in the way of franking credits. The company says it is still considering issuing Ltd (Australia) shares to finance Arcadium, which is currently bridge-financed, as this will increase the free float and could help lower the Ltd-Plc spread.

A Lot to Absorb

Taking all of the above into account, brokers have fiddled their valuation models and made (minor) adjustments to earnings forecasts, resulting in either a higher or lower target price.

The net result among the six brokers monitored daily by FNArena covering Rio Tio is a less than a dollar consensus target increase to $127.17.

Between them, there are three Buy or equivalent ratings and three Hold, unchanged post the investor seminar. This compares to five Buys and one Hold for rival BHP.

Goldman Sachs is among brokers reducing their targets, down -1% to $135.10, while maintaining a Buy rating.

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