Rio Tinto Limited

Mine Operational Challenges Hit Pilbara Shipment Guidance: Rio Tinto Limited (ASX: RIO) has an engagement in minerals and metals exploration, development, production and processing and marketing. The company recently announced the appointment of Barbara Levi to succeed Philip Richards as Group Executive, Group General Counsel. Ms Levi is expected to join Rio Tinto on 1 January 2020.She has over 20 years’ experience in several senior legal roles across Europe and in the US, both in corporate and private practice, and presently serving as a Group Legal Head, M&A and Strategic Transactions for Novartis.

In another update, Company’s Director Dame Moya Greene has notified the Board of her intention to step down as a Non-Executive Director of Rio Tinto with immediate effect on June 26, 2019.On the same date, the company announced that Oyu Tolgoi LLC, where Rio has a 33.5% indirect ownership interest, has entered into agreements with three Chinese EPC contractors, each of which potentially creates a smaller related party transaction for the purposes of the UK Listing Rules. Oyu Tolgoi LLC will pay US$350,000 to that bidder to offset the costs of preparing that bid and the early engineering and design work packs.

Due to mine operational challenges at the Greater Brockman hubin the Pilbara, RIO has revised its guidance of Pilbara shipments (100% basis) for 2019, to be in between the range of 320 million tonnes and 330 million tonnes, as compared to the previously stated range of 333 million tonnes and 343 million tonnes.

Q1FY19 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 Key Production Metrics (Source: Company Reports)

What to expect: As per the release, the Company expects a loss of approximately 14 million tonnes of production in 2019, due to the impact 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.

Its expected share of Bauxite production 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 in the range of 8.1 to 8.4 Mt. Its 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: RIO’s gross margin, EBITDA margin and net margin for FY18 stood at 66.5%, 41.5% and 34.4%, respectively, which are better than the industry median of 40.7%, 30.2% and 14.8%, respectively, implying decent financials.
However, it is presently trading close to its 52 weeks high level of $107.990, and therefore probability for correction increases. Moreover, the company has reduced its production guidance for few commodities. Hence, considering the aforesaid facts and current trading level, we recommend an “Expensive” rating on the stock at the current market price of $103.910 (up 0.348% on July 15, 2019).
 

Lucapa Diamond Company Limited

Trading Close to 52 Weeks Low Level: Lucapa Diamond Company Limited (ASX: LOM) is engaged in the exploration, development and mining of diamond projects in Lesotho (Mothae), Australia, Botswana and Angola (Lulo). The company recently published its June ’19 quarter update where it highlighted that Mothae and Lulo produced large and high-value diamonds, with more than 75% of revenues from both mines generated from the recovery of +4.8 carat stones.Moreover, with the arrival of an extensive new fleet of earthmoving equipment, LOM is well positioned to build on those results in H2 2019.


June ’19 Quarter Production and Sales Data (Source: Company Reports)

At the end of the June quarter period, LOM had a group cash balance of US$5.2 million, while Lulo mining company SML (which is treated as an associate and not consolidated into Lucapa’s accounts in accordance with IFRS) held US$9 million in cash and equivalents. Additionally, Mothae held 3,855 carats in inventory at the Quarter end and SML held 3,147 carats. The next diamond sales from both mines are scheduled for July 2019.

What to expect: Mining at Mothae kimberlite mine is on track to transition to the higher-margin diamond zones in the southern pit following further good progress made during the Quarter in raising the wall of the new main 500,000 m³ water dam.As a result, mining and processing of higher-margin kimberlite material from the southern pit will commence early in Q3 2019 and continue throughout 2019. As the dry season commenced, mining at Lulo alluvial mine has moved to flood plain blocks which are producing average grades of more than twice those achieved during the June ’19 Quarter.

Stock Recommendation: Lucapa’s share generated negative YTD return of 16.22%. It is presently trading close to its 52 weeks low level of $0.145. Its current ratio for FY18 stood at 0.68x, lower than the industry median of 1.70x. Its three-month return stood at -8.82%. Based on the mixed scenario, we have a wait and watch stance the stock at the current market price of $0.165 per share (up 6.452% on 15 July 2019). 

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