From Deutsche today:
Day 1 of Rio’s four day long tour of its Pilbara operations revealed significant capex savings, a faster ramp-up to 290Mtpa, and mine expansion options for the Stage 2 expansion to 360Mtpa. Rio again demonstrated their industry leading ability to deliver projects ahead of budget and schedule in our view. In summary, expansion capex (from 220-360) is now being guided to less than US$140/t, representing a saving of at least US$1b. Rio will now hit the 290Mtpa run-rate in May 2013 and could exceed our 2014 modeled shipments of 290Mt. After outlining mine expansion options to 360Mtpa, we see no reason to adjust our 2015 and 2016 sales forecasts of 323Mt and 366Mt respectively. We continue to believe that the market is underestimating the Pilbara ramp-up and potential capex and opex savings. Buy on valuation.
Capex savings
Significant capex reductions with the expansion at Cape Lambert (US$0.3b), further savings with the delay of Brockman 4 Stage 3 (another US$0.3b) and a reduction in contractor rates (US$0.2b) mean that total expansion capex will be less than US$140/t or US$19.6b on a 100% basis compared to previous guidance of “mid US$140’s/t” or US$21b (adjusted for the recent 7Mtpa system up-rate). This excludes benefits from a weaker AUD, which in our view could lower capex by another US$0.5-1b. This could go a long way to lowering our 2014 group capex estimate of US$12.5b down to Rio’s US$11b target. Stage 1 was delivered for less than US$140/t and Stage 2 capital intensity is expected to be “well under” Stage 1. This implies savings on the Stage 2 infrastructure (US$5.9b) and mine capex of around US$4b.The ramp-up to 290
First ore was shipped four months early and the ramp-up is now underway. After shipping 57Mt in 2Q13 (impacted by a conveyor belt tear), shipments will now step-up quickly. Using a ruler on the chart provided, the shipping ramp-up over the next four quarters (3Q13-2Q14) appears to be roughly 62, 68, 71, 73Mt, which is almost identical to our current forecasts. Considering Rio is generally conservative, we see upside risk to these numbers. Rio will be shipping out over 20Mt of stockpiled ore built up over the last 2 years.The options for 360
Rio continues to evaluate its options and outlined 25Mtpa of brownfield and some 60Mtpa of greenfield expansion opportunities. These fit well with those outlined in our recent “Cracking the Pilbara code” report published on 15 August 2013. There are some differences however. The 15-20Mtpa Brockman 4 Stage III expansion will unlikely feature in 360, whereas production from the large 50-70Mtpa Koodaideri deposit may feature in 360.
