Citi Upgrades Rio Tinto From Sell To Neutral

Rio Tinto plc (ADR) RIO has lowered its managed WA production guidance for 2017 from ~350mt to 330–340mt, which implies largely flat production in 2016.

Citi’s Heath R. Jansen upgraded the rating on the company from Sell to Neutral, while raising the price target from £20 to £21.

Guidance Lowered

Jansen explained that the upgrade was based on an earnings upgrade of more than 20 percent for 2016 and 2017, driven by higher iron ore prices.

However, the company has lowered its managed WA production guidance for 2017, driven primarily by “lack of success in implementing the automation of the rail road.”

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Rail Capacity

Jansen believes capex could have been used to overcome the lack of rail capacity, with the purchase of more locomotives and wagons. However, Rio Tinto is currently trying to minimize capex, while iron ore prices are meaningfully higher.

“AutoHaul will increase the capacity of the rail system to match port capacity of 360mtpa, although further mine capacity expansions will be required to fill and maintain this capacity,” according to the Citi report.

Capex

The analyst expects higher oil costs to offset savings, leaving costs largely unchanged in 2018, while rising in 2019 and beyond due to further increases in oil prices and industry cost inflation.

“With the approval of Oyu Tolgoi and the investment into additional Pilbara mine capacity we expect capex to bottom at US$4 billion in 2016, before rising to US$5 billion in 2017 and further to US$5.3 billion in 2018,” Jansen added.