Lowering Estimates on Rio Tinto: Large Upside Remains from Global Growth
We have lowered our price estimate for Rio Tinto (NYSE:RIO) in light of changing market conditions. We are now forecasting a moderate reduction in shipment numbers across all divisions going forward, and we believe that though the company may see a slight decline in the shipment growth rates throughout 2011 and 2012 with the ongoing economic uncertainty. However the fundamentals look positive and the long term growth potential remains robust. Rio Tinto has nearly $27 billion worth of projects planned for development going forward. These include the expansion of existing facilities as well as certain green field projects, leveraging the massive amount of mineral resources the company controls. Below we take a look at some of the company’s key developments and planned projects. Rio Tinto competes primarily with global metals and mining giants like Vale (NYSE:VALE), BHP (NYSE:BHP), Freeport McMoran (NYSE:FCX) and other companies that mine bauxite, copper, coal and iron ore.
Our price estimate of $82 implies around 70% upside. We believe this reflects the long term value of Rio’s business beyond the swings in commodity price that we believe will trend higher driven by demand in developing markets in the coming years.
Increase in the Copper Mineral Reserve at Kennecott Utah Copper
Rio Tinto’s investor seminar last week showcased the robust sales and growth potential that the company plans to leverage. [1] In this report, the company indicated that it will increase of the contained copper in the mineral reserve at its wholly owned Kennecott Utah Copper Bingham mine by 730,000 tons. [2] In addition to the copper resources, the company also reported an estimated increase of 1 million ounces of gold and 13 million ounces of silver over the 2010 year-end estimate for the region.
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The increase in the mineral resource base largely comes from the company’s aggressive investment in exploration activities for copper as the metal is in short supply and high demand globally. Rio Tinto has allocated US$165 million to complete the next stage of exploration by 2014 in addition to the previous approval of $238 million to extend the life of the mine to 2028. The access to higher grade ore will significantly increase the output of the mine in addition to reducing the production costs in the region.
Pilbara Iron Ore Expansion
The company estimated that iron ore shipments can rise by more than 50% by 2015, the demand primarily coming from developing nations like India and China. To meet the expected rise in demand, the company is gearing to ramp up its various production facilities. In a recent announcement, Rio Tinto declared its plans to invest $833 million in fuel and power supply projects to increase production at its iron ore facility in Pilbara, Western Australia. [3]
In a separate announcement earlier this month, the company announced a $313 million investment in the Pilbara mining operations to develop a sustainable water supply using the coastal water in order to accommodate the expansion of annual production capacity up to the planned 333 million tons per annum. [4]
With production costs soaring due to the increase in labor and other raw material costs, the company is preparing itself by investing in developing basic resources for carrying out the mining operations.
Hedging Fuel Price With Coal
The Riversdale acquisition has provided Rio Tinto an opportunity for sustainable development up to 50 years. The planned $2 billion Kestral Mine extension will extend the life of the mine to 2032. [1] Coal production provides the company with an opportunity to hedge against rising fuel prices going forward, keeping overall margins healthy.
Although in the short term global markets look weak, Rio Tinto is aggressively focusing on expansion and new project development in order to meet future demand, and we believe that the company will benefit from that long-term focus.
See our complete analysis of Rio Tinto’s stock here.
Notes:- Rio Tinto Investor Seminar, Rio Tinto, Sept 2011 [↩] [↩]
- Rio Tinto announces a 730,000 tonne increase of contained copper in mineral resources at Kennecott Utah Copper, Rio Tinto, Sept 2011 [↩]
- Rio Tinto to invest further US$833 million in Pilbara iron ore expansion, Rio Tinto [↩]
- Rio Tinto invests US$310 million for Pilbara coastal water project, Rio Tinto [↩]