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Rio stocks given outperform recommendation on copper growth - RBC

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Analysts at RBC Capital Markets have given Rio Tinto stocks an outperform recommendation on the company’s strong copper growth profile.

“The supply side for copper remains tight given falling grades, infrastructure constraints and smaller developers being challenged to raise finance,” the analysts said in a note, following a presentation given by Andrew Harding, ceo of Rio Tinto Copper.

Rio is focusing on existing projects, they added, but it is not ignoring other opportunities, including those in Africa.

Organic growth includes focus on developing the first phase at Oyu Tolgoi in Mongolia, life-of-mine extension studies at Kennecott Utah Copper, and a $1.4 billion approval for two projects at Escondida in Chile.

The company is also looking to increase production at Northparkes in Australia, and progressing development at Resolution in the USA and La Granja in Peru, the analysts said.

At Oyu Tolgoi, the key challenge will be achieving a stable power supply from China by July 2013, so that the concentrator in can be started up in the third quarter.

“Harding appears confident the supply agreement will be completed in time. Thereafter the project has four years to construct its own coal-fired 450MW station,” the analysts said.

At Kennecott, in the long-term, there are plans for an underground mine, they added. The first step will be the North Rim Skarn development, which contains 20 million tonnes of copper at 3.6%, and 1 million oz gold. A $164 million pre-feasibility study has already begun.

At Northparkes, a $114 million pre-feasibility study has been approved, to increase the operation’s output to 150,000 tpy with a 20-year mine life. First production is expected by 2015, RBC said.

Rio’s land exchange at Resolution is now before the US Congress, and the company has approved a starter mine at La Granja, with a possible start-up and cathode production in 2017.

“Rio is [also] developing new processes including tunnelling and copper recovery. It is also using Northparkes as a “block-cave” school to develop in-house skills for its underground mines,” the analysts said.

There remain, however, some concerns over costs, they added. Rio has said there are worries over inflation in capital and operational expenditure.

By-product credits
The company highlighted the benefit of by-product credits, such as gold at Oyu Tolgoi and Grasberg, which will help to keep Rio at the lower end of the cost curve.

“While iron ore is absorbing the bulk of Rio’s capex and accounted for 73% of 2011 [earnings before interest, taxation, depreciation and amortisation], copper growth remains strong, with growth to [about] 1 million tpy, and gold to 1 million oz per year by 2015,” the analysts said.

“Given a likely tight supply situation, we see Rio’s copper division underpinning our outperform recommendation,” they added.

Rio Tinto’s shares were trading at 3,466 pence each on the London Stock Exchange as of 15:27 BST, down 1.07% compared with the close of trading on Friday April 27.

Claire Hack
chack@metalbulletin.com
Twitter: @clairehack_mb

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