Rio Tinto Limited

Rio discovers Cu-Au mineral at the Yeneena Basin: Rio Tinto Limited (ASX: RIO) recently announced further details on its global tailings facilities. The Company has provided additional information about the construction, management, and monitoring of facilities, including independent reviews. Rio Tinto managed facilitieswill be subject to three levels of governance and assurance, where the first level of assurance takes place at the asset itself, with the main tenetsbeing effective facility design, regular reviews, and comprehensive operational controls. The second level is an assurance to Rio Tinto Standard through the periodic Business Conformance Audits and Technical Reviews, supported by the Rio Tinto’s Surface Mining Centre of Excellence. However, the third level of assurance is independent of site management as well as normally conducted by the third parties.

In another update, the Company discovered copper-gold mineralisation at the Winu project in the Yeneena Basin of the Paterson Province in Western Australia. While results continue to be encouraging, the exploration project is still at an early stage and drilling to date does not allow sufficient understanding of the mineralised body to assess the potential size or quality of the mineralisation nor to enable estimation of a Mineral Resource. The assessment and interpretation of existing data are ongoing and is being used to help guide drilling in 2019.

Q1FY Key Highlights: Pilbara iron ore production and shipment decreased by 9% pcp to 76.0 Mt and 14% pcp to 69.1 Mt, respectively. However, its Bauxite, Mined copper, Titanium dioxide slag, and IOC iron ore pellets and concentrate production increased by 1%, 3%, 1%, and 5% respectively.
 

Q1FY19 Production Highlights (Source: Company Reports)
 
 
What to expect: As per the reports, the Company expects a loss of approximately 14 million tonnes of production in 2019, due to theimpact of the disruption caused by Tropical Cyclone Veronica in March, combined with the impact of the fire at Cape Lambert A in January.Rio Tinto’s Pilbara unit cost guidance in 2019 remains at $13 - $14 per tonne. Rio Tinto’s expected share of Bauxite production guidance in 2019 is unchanged in between 56 and 59 Mt. Aluminium production guidance is between 3.2 and 3.4 Mt and alumina production guidance is 8.1 to 8.4 Mt. Rio Tinto’s share of mined copper production for 2019 is unchanged and is between 550 and 600 thousand tonnes, subject to grade availability. Refined copper production is expected to be between 220 and 250 thousand tonnes. Diamond production guidance for 2019 is between 15 and 17 Mn carats.

Stock Recommendation: Its gross margin, EBITDA margin and net margin for FY18 stood at 66.5%, 41.5% and 34.4%, which are better than the industry median of 40.5%, 29.5% and 14.0%, respectively, implying decent fundamental of the company.  Moreover, it is trading closer to its 52 weeks high level, and therefore the probability for correction increases.

Hence, considering the aforesaid facts and current trading level, we think that the stock is “Expensive” at the current market price of $105.340 per share (up 3.427% on June 14, 2019).
 

Fortescue Metals Group Ltd

A Look at Recent Updates: Recently, there was an announcement about the execution of a Farm-In and Joint Venture Agreement between FMG Resources Pty Ltd and Strategic Energy Resources. This was done to explore SER’s Myall Creek Copper-Gold project in South Australia. FMG Resources Pty Ltd is a subsidiary of Fortescue Metals Group Limited (ASX: FMG). FMG will spend $1.5 Mn on exploration over 5 years, including a minimum of 1500 meter of drilling at Myall Creek (EL6140 and EL5898) to earn an 80% interest in the project. The Myall Creek tenements lie within the Cultana Training Area controlled by the Department of Defence. SER has built a solid relationship with Defence over many years and has already been granted access to explore within the training area. In another update, FMG Resources Pty Ltd executed a conditional, formal Farm-in and joint venture agreement with Tasman Resources Ltd, over Tasman’s wholly owned Exploration Licence 5499 that hosts the Vulcan iron oxide-copper-gold-uranium prospect.

March’19 Quarter Key Highlights: The Total Recordable Injury Frequency Rate (TRIFR) reduced to 3.6 from 4.0 in December 2018, on a rolling 12-month basis. Shipments compared to the December 2018 quarter were 10 per cent lower primarily due to the impacts of Tropical Cyclone Veronica which closed the port for five days and caused localised flooding to the railway in the immediate vicinity of the Port operations.

West Pilbara Fines shipments for the quarter were 3.8mt, 10 per cent of the total for the quarter with FY19 total shipments expected to be between 8-10mt. C1 costs were higher than the prior quarter at US$13.51/wmt, due to the impact of Tropical Cyclone Veronica on shipments.

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Q3FY19 Shipment Summary (Source: Company Reports)

Total capital expenditure for the quarter was reported at US$196 Mn inclusive of sustaining capital, exploration and development expenditure.

What to expect: It is expected that the company’s total shipment for FY19 would remain in between 165-170 Mt, inclusive of West Pilbara Fines product of 8-10 Mt. FMG’s C1 cost for FY19 is expected to be between US$13-13.50/wmt. The total capital expenditure is expected to be US$1.2 Bn, inclusive of Fortescue’s share of the Iron Bridge Magnetite Project for FY19. The depreciation and amortisation for FY19 is expected to be around US$7.10/wmt.

Stock Recommendation: Its EBITDA margin and net margin for H1FY19 stand at 44.9% and 18.2%, which are better than the industry median of 34.6% and 13.0%, respectively, implying decent fundamentals of the company. Its ROE for H1FY19 stands in-line to the industry median at 6.5%, which implies the company generated decent returns for its equity holders.

Hence, considering the aforesaid facts, we recommend a “Hold” rating on the stock at the current market price of $8.800 per share (up 5.389% on June 14, 2019).  

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