Rio Tinto plc Expansion Plans

RIO: 3140p
Buy
Target: 4000p

Basic Resources – Mining – General Mining
Iron ore mine expansion to 350Mt unveiled
What’s new?
Rio Tinto management have outlined the route to fill the bulk of the 360Mt logistics capacity currently being developed A mix of brownfield expansions at various mines plus new greenfield mines at Silvergrass and, in the latter part of the decade, Koodaideri. Management is targeting 330Mt ore production in 2015 from with 350Mt capacity by 2017.
Impact 
Our current estimates had assumed that management would fill the new transport capacity on roughly this timetable. Our current assumptions see the Pilbara produce 282Mt in 2014 rising to 321Mt in 2015 and plateauing at 348Mt in 2017. We had assumed a RIO share of capex of US$6.6B to develop this mine output.
The volume estimates are broadly in line with the comments from management.
We had assumed that the mining capital cost intensity would be ~US$95/tonne on top of a logistics cost intensity of ~US$50/tonne. From the comments from RIO this morning the capital cost intensity of the mining assets looks to be ~US$70 – 80/tonne or 15 – 25% lower than the earlier estimate. This, all else equal, should mean net we can expect improved cash returns on cash invested from RIO over the latter part of the decade further bolstering its appeal.
Valuation
We retain our BUY recommendation and 4000p 12 month price target. We derive our price target using a mix of EV/EBITDA, P/CFPS and NAV based methodologies.
The main risk to our view is lower than expected iron ore prices. The announcement gives us increased confidence in our production forecasts for RIO through the next few years, increasing our conviction that the volume growth to
be delivered will drive falling EV/EBITDA mutliples and a rising dividend yield, underpinning RIO’s attractive current valuation.
Share performance catalyst
The next catalyst we expect is the investor presentations on Dec 2 (Australia) and Dec 11 (UK). After this we expect an agreement with the Mongolian government allowing underground development to restart will be the next operational catalyst.

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