UBS: Don’t go to RIO

UBS says don’t go to RIO:

RIO’s new mgmt team set out its strategy to focus on operational performance,

ESG credentials & growth, while rebuilding trust after Juukan Gorge. It aims to cut its Scope 1&2 emissions faster (-50% by 2030) at a cost of ~$7.5b. RIO pivots the business more towards growth in energy transition commodities, lifting 2023/24 capex to $9-10b (from ~$8.5b). RIO now looks beyond ‘Tier 1’ assets & low-risk jurisdictions and considers M&A; in our opinion, Simandou & Saguenay Al growth are more likely. We trim forecasts for higher capex/opex & cut NPV ~10%; this results in our tgt falling ~8%.

1) Decarbonisation: high capex to future proof the portfolio, returns uncertain

(1) Decarbonisation: RIO lifts its 2030 Scope 1&2 CO2 target reduction to -50% vs 2018 base (from -15%); in 2020 S1&2 emissions totalled 32Mt. The ~16Mt CO2 reduction will come from: Pilbara renewables (~1Mt from deploying ~1GW of renewables to replace gas-based power for fixed plants; these emit ~33% of total Pilbara emissions); repowering PacAl (~5Mt reduction at Tomago & Boyne Island; this requires 5+GW of renewables (RIO share) costing $5-7.5bn); various abatement projects (~4Mt of which ~50% are NPV positive); and other energy efficiencies, ELYSIS (new Al inert anode technology) & carbon offsets. RIO expects to spend $7.5bn on decarbonisation by 2030, with $0.5b pa in 2022-24 (mostly Pilbara renewables) and $5b in 2025-30. ELYSIS is on track for commercial scale technology in 2024. RIO expects decarbonisation to ‘future-proof’ the portfolio, but the benefits to shareholders are hard to value. With Scope 3 (519Mt CO2 in 2020), RIO looks to provide targets in Feb-22.

2) Pivoting to growth; 3) M&A opportunistically; 4) Pilbara volumes to lift

(2) Growth: RIO looks to double growth capex to $3b pa from 2023, growing in copper, battery raw materials (eg Jadar) & high-grade iron ore (eg IOC, Simandou); it will look beyond “Tier 1” assets & low-risk jurisdictions. RIO still discusses infrastructure sharing at Simandou with SMB-Winning; it will not compromise on ESG. RIO expects to double copper production to 1.2Mtpa from OT (+400kt), Resolution, Winu etc; the discussions on licences/ power etc continue with the Mongolian govt. (3) M&A: RIO looks to opportunistically grow inorganically; it aims to maintain “Single A” credit metrics but would allow this to fall temporarily for the right acquisition. The capital allocation process is unchanged. (4) Pilbara: RIO expects to lift production to 345-360Mt (from 320-325Mt in 2021) as its new replacement mines (+90Mt) & Gudai-Darri (+43Mt) ramp up. RIO flags more replacement mines are needed in 2023-24; opex is challenged by a higher work index though Gudai-Darri will improve mix & strip ratio.

This is based on an iron ore price of $80+ in 2022. Too bullish for me!

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