This smart miner is winning the race for resources

This is because much of the hard work has been done: its copper assets are growing, high-grade iron ore assets in Guinea can be sold directly into the growing low-carbon steelmaking industry, and aluminium is set to become more important as the energy transition fuels demand. 

But first, a quick recap of the actual trading performance of the company, which has been lost in the froth in recent months.

Rio Tinto expects to ship 323mn to 338mn tonnes of iron ore from the Pilbara region of Western Australia this year, at a cash cost of $21.75 to $23.50 a tonne. The year didn't get off to a flying start: iron ore shipments fell by 10 per cent between January and March versus the previous quarter. However, the miner has not adjusted its full-year expectations, and the consensus forecast for cash profit in 2024 is still a fifth ahead of 2023 at $24bn.

Iron ore prices have steadily declined this year, from $140 a tonne in January to $107 currently, but the higher copper price should make up for this.

Rio Tinto's current dividend yield is 6.5 per cent, as per FactSet, putting it ahead of BHP (5.4 per cent) and Glencore (GLEN), which offers just 2.2 per cent after it cut the payout ahead of the Teck Resources transaction. The Swiss mining and trading giant also uses buybacks to return cash to shareholders, however. 

Dividends have come down from the record highs of 2022, but Bernstein forecasts an average yield of 6 per cent for the coming years and thinks Rio Tinto can generate $30bn of cumulative excess cash by 2030. Special payouts are also possible therefore, said analyst Bob Brackett.

Liberum is more pessimistic and expects the yield to come down to 3 per cent by next year. The investment bank’s analysts have a more bearish view on copper and iron ore prices, forecasting $85 a tonne for iron ore next year compared with the consensus of $101. 

Decarbonisation "sweet spot"

An underappreciated element of Rio Tinto’s investment case is its research and development spending. This month, the company announced a $142mn ‘microwave’ in Western Australia, which is part of a push to decarbonise steel-making. The facility will convert lower-grade iron ore from the Pilbara into a higher-grade ore suitable for the next generation of steel foundries, which use electric arc furnaces rather than metallurgical coal to turn the iron to steel. 

Bernstein said Rio Tinto was in a "decarbonisation sweet spot". 

The company is already a specialist in lower-carbon aluminium production, and will ramp up recycling output through a new joint venture with Matalco, a leading producer of recycled aluminium.

“We are, with the acquisition, increasing our global sales of aluminium by up to 30 per cent,” said Rio Tinto's chief executive, Jakob Stausholm, last month. “It's significant. We are now in recycling not just kind of as a hobby but at scale.” 

The mix of iron ore products is also changing as the world decarbonises. Rio Tinto expects demand for direct reduced iron – considered to be an important step towards greener steel – to double from 125mn tonnes last year to 250mn tonnes in 2035. This is over a decade away but will mean a rapid increase in demand for higher-grade iron ore. The company will be able to sell this from its Simandou mine in Guinea. 

Optimism over the Simandou project will make a welcome change for shareholders. Industry observers had previously said a massive new, high-grade mine would expand supply of the steelmaking ingredient significantly enough to knock prices. The project itself has also been a headache. After years of permit and legal troubles, however, all parties involved are now working together. Rio owns 53 per cent of joint venture Simfer, which itself has the rights to two ‘blocks’ of Simandou. The other partner on those blocks is Chinese state mining giant Chinalco. 

The quality of the iron ore deposit at Simandou has never been in doubt – it is the positioning of it. A rail line to the closest port will be 670km long. The big miners are used to building railway lines – Rio manages thousands of kilometres of tracks in the Pilbara – but the Simandou line has to cut across far more difficult terrain, including mountains. Rio’s will pay $6.2bn towards the total $15bn being ploughed into the mine and relevant infrastructure. $2.5bn is expected to be spent on the railway line. 

Capital spending will peak this year and next, at just over $1.6bn each year. When production is fully ramped up in 2028, HSBC analysts have forecast a cash cost of $44 a tonne, compared to $30 a tonne for Rio’s Western Australia operations. But further out, the analysts see a return on capital of 13.5 per cent and an annual cash profit of $1bn. 

These forecasts sit atop a mountain of risks. Guinea is currently under military rule, with elections promised by the junta by the end of the year, and building the railway and port could also throw up challenges. 

Plenty of irons in the fire

Iron is far from Rio Tinto's only opportunity, however. Currently the cash profit split is around 70 per cent iron ore, 10 per cent copper, 10 per cent aluminium and some extras from diamonds, borates and titanium. Bernstein analysts see this shifting to 60 per cent iron ore, around 20 per cent copper and about 15 per cent from aluminium by just 2026. This is largely due to Oyu Tolgoi, a copper mine in Mongolia.

Much like Simandou, Oyu Tolgoi looked like a drag on returns just a few years ago. Rio Tinto was facing cost overruns and pushback from minority investors. Sentiment has now flipped, however, and investors are looking forward to the significant increase in copper output as prices soar.

Analysts see the potential for Rio to catch up to BHP in terms of production of the red metal – it could close to 900,000 tonnes by the end of the decade, a 50 per cent increase on last year. 

A big question mark still hangs over a Rio Tinto's Resolution copper project in the US, however. With a potential output of 450,000 tonnes a year over 40 years, it is a huge potential mine. But development is currently held up by local opposition. The project is battling its way through the courts, with the latest decision going in favour of Rio. One Apache group says developing the site will destroy a sacred site. 

“It has limited downside if it’s not developed, but significant upside if the project goes ahead,” said Bernstein.

When it comes to Rio Tinto, and mining projects more generally, uncertainties abound. However, the long-term catalysts are firmly in place and – assuming dividends remain generous – investors are being paid to bide their time.