Questor share tip: Rio Tinto shares jump on production upgrade

As copper and iron ore prices stabilise, the mining group boosts output in the third quarter, says Questor.

Rio Tinto
£32.15+131p
Questor says BUY

RIO TINTO has upgraded its mineral production targets as the commodity market continues to stabilise. Shares in the miner increased more than 4pc, making it the largest gainer on the blue-chip index, on the improved copper production outlook announced in yesterday’s third-quarter production update.

The group said copper production, which makes up 7pc of group earnings, rose by 23pc on the previous quarter to 162,000 tonnes. The increase was driven by a faster recovery than expected, after landslides at the Kennecott mining operation in Canada. Group copper production targets for the full-year were increased by 35,000 tonnes to 590,000 tonnes.

Iron ore production, which generates 89pc of the group’s earnings, was 68m tonnes in the third quarter. That brings iron ore production in the year to date to 195m tonnes, putting the group on target to exceed the 265m tonnes produced last year.

Commodity prices have also remained resilient, having fallen sharply throughout 2012. The copper price has remained stable at about $7,300 (£4,600) per tonne for the past six months. Iron ore has also stabilised, at about $130 per tonne. The improved commodity market prices bode well, given the production ramp-up.

Fears of a hard landing for the Chinese economy, that consumes about half the world’s commodities, also appear overdone. Chinese ore imports hit a record of 74m tonnes in September, demonstrating the country’s steel producers are more optimistic. Copper imports in China also increased, 18pc to 458,000 tonnes, in September from the previous month. Analysts think this points towards the end of China running down existing stocks at copper warehouses.

For the mining industry there is an obvious problem with increasing production when commodity prices are soft. If miners go too far then they will flood the market and prices will collapse again.

However, so far the signs on prices are encouraging and, even if iron ore prices weakened to $110 per tonne next year, it wouldn’t be a disaster.

Rio Tinto shares are very reasonably priced, trading at nine times 2014 forecast earnings, For that price investors also get a forecast dividend yield of 4pc that is covered three times by earnings. The commodity markets are by no means pretty but, then again, at these prices they don’t have to be.

Questor said buy at £28.06 and, with shares up 14pc since then, they still offer value. Buy.