MARKETS SPECTATOR: Rio and the Citi

Citigroup sees Rio Tinto as trading at an 'attractive discount' on the strength of its iron ore outlook, despite a landslide at its Utah copper mine.

Seven days ago Rio Tinto's unit, Kennecott Utah Copper, was struck by a landslide. Rio says the Bingham Canyon Mine knew the slide, in excess of 150 million tonnes of material, was going to happen. It had moved equipment, infrastructure, roads and people away from the affected area. No one was hurt.

Nevertheless, damage to three shovels, 14 trucks and other equipment was sustained, according to Rio’s first-quarter production report. Kennecott Utah Copper’s refined copper production may fall by as much as 125,000 tonnes this year, Rio said.

The company says ore production is suspended. The mine’s concentrator has been shut down. Its smelter and refinery are operating at reduced levels.

“Timing to restart ore production remains under evaluation,” Rio said. The company gave no estimates as to what the landslide may cost it in terms of production lost or the cost to replace shovels and trucks lost.

Perpetual analyst Andrew Corbett estimates the cost of the slide to Rio is about $600 million. The company may have to spend as much as $500 million to replace damaged equipment while it may lose as much as $100 million from the suspension of copper production, according to Corbett.

Still, Rio is trading at an “attractive discount” to its net present value of $72 a share, according to Citigroup. Iron ore will contribute about 80 per cent to Rio’s earnings before interest and tax this year, Citi estimates. The broker has increased its forecast for iron ore prices in 2013 to $US128 a tonne from $US120 a tonne. It reckons Rio’s Pilbara iron ore mine production will increase both in size and profit margin.  

Citi figures Rio’s debt will be reduced by US$6 billion in 2014 through increased cash flow, reduced capital expenditure and possible asset sales. That may mean that Rio shareholders get higher dividends next year and the company may buy back shares.

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