Monsters of Rock: UBS trims target on Rio as big miner looks outside Tier 1 countries for growth

To say Rio Tinto’s decarbonisation story has received a mixed reaction this week would be an understatement.

The mining giant has pledged to spend up to US$7.5 billion over the course of this decade to superpower its green transition and hit a greenhouse gas emissions reduction goal that has now tripled to 50% of Scope 1 and 2 emissions by 2030.

All well and good, but analysts are wary that the increase in capital investment on engineering the transition at Rio’s existing operations will eat into cash returns, the hallmark of the big miners’ businesses in recent years.

Rio wants to reduce 16Mt of emissions from its own operations by 2030, with 1GW of wind, solar and batteries at its Pilbara iron ore operations to wean the miner off the 480MW gas-powered microgrid it counts as one of the world’s largest.

It also wants to roll out 5GW of wind, solar and energy storage at its East Coast aluminium smelters, some of the largest energy users in Australia, while doubling its growth capex from US$1.5b to US$3b from 2023 to expand its hunt for battery commodities like copper and lithium.

Capex is expected to rise to US$9-10b from 2023-2024, likely eating into shareholder returns as Rio ramps up its investment in decarbonisation, UBS’ Lachlan Shaw says.

The investment bank, which is bearish on iron ore, has dropped its target price for Rio Tinto from $84 to $79 and reiterated its sell rating on the stock, which was down 1.82% to $95.03 today.

Rio looking outside Tier-1 jurisdictions

Rio has become the latest major to cast its eyes beyond the generally regarded Tier-1 jurisdictions of Australia, Canada, the US and South America in its hunt for growth.

Rio executive Mark Davies told investors on its investor day panel on Wednesday only Russia and a handful of other jurisdictions were off limits in its search for commodities useful to the energy transition.

“So I think one of the key changes that we’re looking at making is, is really for exploration and their project development teams opening up the portfolio, a broader range of options … a broad range of commodities probably focused around those commodities that support the energy transition,” he said.

“A broad range of countries (with) probably only one or two exceptions, maybe Russia that we wouldn’t touch, but I think really, really opening up the portfolio, looking at smaller, smaller projects, and a minimum viable project approach where we start small and grow and create optionality and many of our assets actually over over time have come from that.

“If I were to summarise I would say we’re going to move from a short green list to a very short red list.

“That will not only give us a better chance of success but we can kill things quickly because we’ve got the next thing to move on to.”

In particular, its executives are remaining upbeat on the idea its high grade Simandou project in Guinea can be brought into production in spite of the historic challenges associated with developing iron ore projects in West Africa.

Rio executive Bold Baatar described Simandou, with its low impurities and 67% iron ore grade as the “Rolls Royce” of iron ore, suggesting unlocking the deposit – and negotiating complex relationships and infrastructure developments with Chinese partners and the Guinean Government – would be a key in providing iron ore for a low carbon steel industry.

“One thing that you have to think about is if you would like to reduce CO2 the steel blast furnace emits 2 tonnes of CO2 for every tonne of steel production,” he said.

“If Simandou ore comes in it raises a potential to reduce it by more than half.

“So I think impeccable ESG has a view towards a balance of many considerations and I think decarbonisation and the future of DRIs is definitely in the cards.”

Materials take a hit with lithium stocks the standouts

The materials and energy sectors closed more than 1% and 2% off, respectively, as big miners copped a hit from weaker commodity prices for coal, iron ore and base metals out of China.

Rare earths miner Lynas Corporation (ASX:LYC) released its September Quarter results, losing 8.1% of its shares as revenue slid from a record $185.9m in the June Quarter to $121.6m in the September Quarter.

It was impacted by Covid restrictions from a third wave in Malaysia, where its rare earths refinery is based, but did have a win this week on its processing plant in Kalgoorlie, with WA’s EPA recommending its environmental approval.

Lithium companies Orocobre (ASX:ORE), Sayona Mining (ASX:SYA) and Liontown Resources (ASX:LTR) were among the better performers.

Orocobre revealed prices for spodumene from its newly acquired Mt Cattlin mine in WA are set to double next quarter to US$1650/t on a 6% lithium oxide basis.