UBS analysts are expecting to see Rio Tinto’s share price fall to $79 within a year due to rising production costs and a weaker Australian dollar.
This would be a decline of about 17 per cent from today’s price of $95.25, and take the stock price back to the lows reached during the March 2020 sell-off.
The UBS team has a ‘sell’ recommendation on the stock, saying “iron ore still looks fragile with port inventories building”.
Following an analyst call hosted by Rio’s Simon Trott, the head of its iron ore operations, UBS analysts reported iron ore demand would remain stable in 2022, but production costs would be higher.
“In terms of the market, (Rio) sees potential for customers to restock in March 2022 post the Winter Olympics and expects underlying demand to remain robust in 2022 with the Chinese government to take action to avoid a property hard landing but equally not to walk back on its carbon targets,” the UBS team wrote in a note to clients.
Rio reported production costs are up $4 per tonne since 2019 to as much as $18.50 per tonne, mostly due to currency fluctuations, tighter labour market, and higher diesel and energy costs.
Capital expenditure would remain at about $3.5 billion per year for the group, with Morgan Stanley analysts pointing out the need for replacement mines.
“Gudai-Darri is expected to replace the depletion of Brockman and Yandi; the next wave of replacement will be via the development of Brockman Syncline 1, Bedded Hill Top and Hope Downs 2,and Western Range, which would come in towards the middle of this decade,” the Morgan Stanley team wrote in a note to clients. They have a target price for the London-listed shares of £48.80, compared to a closing price of £46.21 on Monday.
“The relative size of these expansions is comparable to Gudai-Darri from a size and investment perspective. The company reiterated its need to spend approximately US$2 billion ($2.8 billion) per annum on replacement mines. Beyond the current pipeline, Rio Tinto is contemplating the development of Gudai-Darri phase 2 to replenish mining capacity in the long run.”
Analysts noted mine approvals will have longer timelines due to new Heritage laws introduced after the Juukan Gorge fiasco.
The UBS team estimates dividends per share will be $US12.13 for the year ending 31 December, 2021, thanks to bumper earnings. But dividends will decline in following years to $US5.70 in 2022, then $US4.97, $US5.31 in 2024 before rising again to $US6.42 the following year.
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