Rating Hold Rio Tinto 28 February 2019jamesgurry.com/.../08/RIO...Revisiting-Mongolia-1.pdf · Rio...

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Deutsche Bank Research

Rating

Hold Austr alasia Australia

M&M - Diversified Resources

Company

Rio Tinto

Reuters RIO.AX

Bloomberg RIOAU

Exchange Ticker ASX RIO

Revisiting the Oyu Tolgoi underground

We revise our late 2016 site trip learnings after Rio Tinto puts the project targets on "review"

Oyu Tolgoi project review was the clear negative in an otherwise very solid 2018 result report. We revisit the mine plan and assumptions in this note drawing upon our 2016 site trip. We now factor in $6.1 bn in capex rather than the current under review budget of $5.3bn and anticipate a slower ramp up if the concurrent dual caving path is not possible.

In late 2016 we concluded that Rio had layered the capex budget and timeline with contingency (14% of the $5.3bn budget). Underground development is likely to increase substantially while indirect costs and owners costs , can be cut in our view . The Concentrator cost is unchanged in our assumptions but may be adjusted if the need to expand sooner is pushed out as ramp up delayed_

We value Oyu Tolgoi at $9.1 bn and now that Grasberg is sold and Kennecott continues to be referred to as an asset approaching the latter years of its life, the need to get Oyu Tolgoi optimal up front, before its expected multi decade production life is critical.

Investment Case: Prudent Capital Allocation / Best Positioned in iron ore / Project execution overhang

Rio Tinto delivered full year earnings inline with estimates with a strong return of capital to shareholders as we have come to know consistently in recent years.

Of the peer group we favour Rio Tinto and while we did not go into 2019 as iron ore bulls, the incidents in Brazil have redrawn the iron ore market for 2019. We ultimately expect prices to fade on slowing demand and responsive supply later this year and into 2020 (spot -$80/t, DB -$70 / 65/t in 2019/20) . We think the medium term risk is to downside and this is reflected in our 12 month target price.

Catalyst in August? By the time Rio Tinto updates the markets on its flagship copper expansion project in Mongolia (we anticipate higher capex and extended time to production) iron ore prices could well be in retreat _

Deutsche Bank AG/Sydney

Date IZI 28 February 2019

Results

Price at 27 Feb 2019

Price target - 12mth

52 week range (AUD)

ALL ORDINARIES

Valuation & Risks

James Gurry

Research Ana lyst

+61 -3-9270-4104

Tim Hoff

Research Analyst

+61 -2-8258-1424

Liam Fitzpat rick

Research Analyst

+44 -207-541-3233

Nick Snowdon

Research Analyst

+44-207-54 7-3753

I Key changes

Sales (FYE)

EBIT margin (FYE)

Net profit (FYE)

Source : Dcut:schc Bsn k

I Price/pr ice relative

Jul '17

39,064 to 39,559

32.6 to 32.1

8,189.6to 8,118.4

95 .12

82.50

95.13 - 69.68

6,243

i 1.3%

,j, -1.6%

,j, -0 .9%

Jan '18 Jul '18 Jan '19

- Rio Tinto ALL ORDINARIES (Rebased)

Performance (% )

Absolut e

ALL ORDINARIES Sourer:: Dcum:he Bank

1m

18.2

4.5

3m 12m

29.2 16.6

7.8 1.8

I

Distributed on: 28/02/2019 08:24:14 GMT

Deutsche Bank does and seeks to do business with companies covered in its research reports . Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.

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28 February 2019


Rio Tinto

We make minor earnings changes and leave our TP unchanged at A$82.5/sh. While unit costs creep up the key change has been to remove future modeled buybacks. HOLD rating maintained. Our earnings changes published earlier in: Co si t n delive and strat y. OT a creep ing overhang? HOLD

With project development risks apparent, we continue to highlight the potential for Rio to boost copper volumes via acquisition, a need even more pronounced now Grasberg has been divested (we ran M&A scenarios in Copper Options , 1-Oct-18). We are positive on aluminium, and look for profitability to return to Rio's second-largest business over 2019 as the price appears depressed, and the risk reward favourable (as opposed to iron ore which we see at or near cycle peaks).

[ Forecasts and ratios

Year End Dec 31 2017A 2018A 2019E 2020E 2021E

Sales (USDm) 40,030 40,522 39,559 40,493 40,572

EBITDA (USDm) 18,306 16,576 16,887 16,942 16,613

Net Profit (USDm) 8,627 8,808 8,118 7,920 7,653

EPS (USO) 4.86 5.22 4.97 4 .89 4.73

PER (x) 10.3 11.2 13.7 13.9 14.4

DPS (net) (USO) 2.90 5.50 2 .98 3.43 3.31

Somco: Oaur#h11 &nit. 0111Ullntc,€ r:o111pDtl'( data I

I Key indi cators (FY1)

ROE(%)

ROA(%)

Net debt/equity (%)

Book value/share (USO)

Price/book (x)

Net interest cover (x)

EBIT margin (%)

Sotirca: Daumc1J1: &mk

IZI 19.3

15.1

11.2

25.07

2.7

69.5

32 .1

I


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28 February 2019

IZI M&M - Diversified Resources

Rio Tinto

I Figure 1: EBITDA split by divisions (2019E)

Aluminium 19%

4%

Source: Deut3che Bank estimates

Energy & Minerals 5%

j Figure 3: Iron ore inventory at ports

mt

150

140

130

120

110

100

90

80

70

60

Iron ore 63%

50 +-,--,.-,,-,-,--.--,--,--.--,--,-,--,,-,-,.-.--,--,--,--,-,--,.-,,-,-,.-,--,--,--,-"T

Sourco: Bloomberg Finance LP

Figure 5: Large & medium steel mills' inventory (10 days)

mt

18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 1.0 6.0

Source: CISA

- Large & medium steel mills' inventory


-- voY(RHS)

75%

60%

45%

30%

15%

0%

-1S%

-30%

I Figure 2: Quarterly annualized shipments 04 13 - 04 19 400 (Mt)

350

■ Pilbara shipments

Source: Deutsche Bank estimates, Company data

I Figure 4 : Traders' steel inventory in 26 major cities

mt

12 0

10 0

80

6.0

4.0

20

00

-- Rebar -- Wire rod -- HRC ... - _ _,Medium Plate CRC

99~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

i~gi~8i~8i~8~i~~~gi~2i~g~i8~~8i Source: Deutsche Bank esti'mates, W1ild, Mysteef

Figure 6: Rebar spread - concurrent vs coking coal

RMB/t

4,700

3,700

2,700

1,700

700 mm~ m~ ~~~~~~~~~~~~~~~oo

~1~ 1~ 1i1~1~~~1i~~1~1i ru ro ~ a ru ro ~ a ru ~ ~ a ~ ~ ~ a ru ~ ~ a ru

LL ~ <C ~ C~na~eb~r s~ea~@ ~po'f or';°+s~t :kl~ c~I (~n:rr~t) LL

China domestic rebar (UiS) -- 1.Gs•spot ore +0 6•coking coal(LHS) -- Average

Source: Deutsche Bank estimates , W1i1d, Bloomberg Ailancc LP, Sx Coal

1,500

2,000

1,500

1,000

500

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28 February 2019 IZI M&M - Diversified Resources

Rio Tinto

Figure 7: Extract from Mine Technical Report - Plan was to start at zero and go north and south. Now it seems the location of zero is under review.

Figure 16.18 Footprint Layout and Cunenl Development In Relation lo Major Faults

Figure 8: Oyu Tolgoi original capex cost breakdown and our updated assumptions - underground development cost likely to be increased, areas of contingency are (in our view) indirect costs, owners costs and other costs. The Concentrator cost is unchanged but may be adjusted if the need to expand sooner pushed out due to a slower ramp up of the mine.

Component % Cost DBe change New Total DBe

Underground 48% 2,544 1,500 4,044

Concentrator 3% 159 159

Support infrastructure 8% 424 424

Construction indirect 18% 954 300 654

EPCM 7% 371 371

Owners cost 10% 530 - 265 265

other 6% 318 - 159 159

Total 100% 5,300 776 6,076

Source: Ria Tinto guidance and Deutsche Bank estimates


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IZl M&M - Diversified Resources

Rio Tinto

I Figure 9: RIO operational and financial summary COMMODrlY & CURR~NCY INomlnllll CY18A CY17A CY18A CY\gf CY'.!Of CY.IIF CY.l'lf I Market Dara Lt• Pie T ot1I AUD/USD 0.74 0 .77 0 .76 0 .71 0.70 0 ,70 0 .71 Ticker RIOAA RIO.L Iron ore - lump IUS$/II - CIF 66 78 82 1M 7B 70 71 Share price (local) 95 12 44.25 Iron ore - tlnu (USS/I) - CIF 68 71 70 118 84 60 60 Share pnce (USO equivalent) 679 0 58 .96 Aluminium tUSSl\b) 0 ,73 O.BB 0 .96 0.81 1.04 1.13 1.11 Price difference 15% -13% Bauxite IUSS/1) - CIF 40 40 47 47 52 66 66 Shares on issue 1ml 37 1 1,278 1,649 Ccppor IUSS,,,b) 2 .21 2 .60 2.96 2.81 2.72 2.111 2.86 'II. ol .t.Q l)Otlt l td " Pie 23% 77% 100% Thenn■ I Coll (USS/ti - contnict B3 78 104 11113 103 80 80 Spot FX (AUD:USD) (USD:GBP) 0 71 1.33 Coking Coal (US$/t) 114 210 208 200 170 170 145 Market Cap (USDm) 25,203 75,35B 100,561 Uranium (U S$,'lb) - torm 57 59 62 64 65 66 59 % of mkt cap split 25% 75% Rullle (USS/U 718 n4 830 8111 89B 1,006 1,096 Zircon IUSS/11 774 1168 1,303 1,406 1,441 1,368 1,368 Gold (USS/01:) 1,249 1.259 1,269 1,23 1 1,290 1,392 1,424

l~EY flNANCtAl MffiUCS Undeftying E1mJr,g1 IUstm) 6,100 8,827 B,806 B,118 7,920 7,663 8,683 EPS (USc) 284 486 522 497 489 473 529 EPS Change(%) 13% 72% 7% -5% -2% -3% 12% DPS including spocial (UScJ 170 290 550 299 343 33 1 370 Payout ratio (%) 60% 60% 105% 60% 70% 70% 70% = Operating Cash Flow (includ es inlere sl) (US$m) 8.465 13,884 11,821 12,429 12,965 12,504 13,785 Cape x (US$m) -3,012 -4,402 -5,430 -5,960 -6,36 4 -6,202 -4,423 Acquisi tions, divestmen ts and other (US$m) 908 2,109 6,7 51 -744 0 0 0 Free Cnh Flow - befare div idend■ (US1m) B,361 11,6 11 13,142 11.721 B.BOO B,302 8,363 Dividend - cash basis (US$m ) -2,725 -4.250 -5,356 -9,538 -5,045 -5,452 -5.683 Shala ~bot:U lt.JSS,n,, 0 -2.003 -5,386 -1,700 0 0 0 i NPV apll l JHD18) Oth er cashflow movements (USSm} 147 ,43 188 0 0 0 0 Fr• C.■h Flow - before debt !USSml 3,763 6,136 2,688 -6,612 1,666 860 3,678 0 Fr• Cash Flow yield ('J&) 6!11, 10% 11% 1!11, B!11, B!11, 8% P/FCF (x) 19 2 10 5 87 194 16.6 17.4 11 7

j BA lA NCE SHEET AND RETURNS Nel Debt (USSm) 8,667 3,8'6 -266 11.267 3,701 2,B61 -828 GNring (ND/ND♦E - 9') 17!11, 7% -1!11, 10% 7!11, 6% -2!11, ROE{ %) 13% 21% 20% 19% 19% 17% 18% ROAJ!II,) 8!11, 17!(, 16% 16% 16% 14!11, 1B!11, ROCEl!II,) 11% 17% 18% 17% 18% 16!11, 17% Nat Dobl/EBITDA hcl 0.8 0.2 0.0 0,3 0.2 0.2 0.0 M""'"' •• PRODUCT ION Copper - refin ed (kt) 250 197 275 240 250 250 232 Copper - mln■d (ktl 623 478 634 li88 B17 Bli3 708 lton Of0 lMll • I Ultbut~blO 281 282 291 303 310 311 316 Iron ore (Mt)-Pllblr111009&1- prodn 328 330 338 348 366 368 381 Iron ore (Mt) - PUbara (1009'1- N IN 328 330 33B 348 366 3liCI 381 Iron ore IM O- Global (100%) produchon 348 349 353 368 378 379 384 Iron ore IMU- Global 11009'11hipment1 34B 348 363 3118 376 37B 381 Coal - Hard and Son'll soft cok ing (Mt) 12 10 • 0 0 0 Coal - Thermal !Mt) 17 14 3 0 0 0 0 Bauxite IMt) 48 60 60 68 61 B1 61 Alumina(Mt) 8 8 8 9 8 8 8 Aluminium IMtl 4 4 3 3 3 3 3 Uranium jkl) 3 3 3 3 0 0 Diamonds (Mets) 18 22 18 16 17 17 17 Gold !ko2J 293 260 639 320 37 1 370 370 Til arnum d ioxide feeds tock (kl) 1.049 1,3 16 1. 117 1,320 1,834 1.a22 l .795 Copper Eq Producdon (Mt) B B B e B B B Copper Eq I~ ctlange) 0 0 0 0 0 0 0

icONSOllDATED CAPEX IUSSm) IEBIT□A spfit (2018Fl Growth Aluminium (includes bauxite and alumina) 409 886 921 733 460 160 160 Copper 618 1,050 1,509 1,50 0 1,380 1,380 9B0 Aluminlum Diam onds 68 80 20 80 80 0 0 (includ es Min erals 0 0 0 0 0 0 Energy 0 0 0 0 0 0 Iron Ore 173 518 44 1 1,200 1,800 1,600 0 Total Growth C,pe,c 1,288 2,634 2,882 3,613 3,720 3,140 1,140 Sualllnlng Capex 1,681 1,8'4 2,073 2,447 2,844 3,062 3,283 Total C1pex 2,648 4,478 4,966 1,960 B,384 8,202 4,423 Guidance 5,500 6,000 6,500 6,500

EBl'TDA (USSm) Alum1mu m (Incl udes bauxite and alumi na) 2,472 3.423 3,095 3,654 4,354 4,984 4,622 Coppe r 1,148 1,617 2,4 7 5 1,541 1,753 2,008 3,251 ,-1.Ac(~I,

Diamonds 239 287 301 255 260 255 263 51' Mi nerals 555 804 748 972 1,180 1,230 1,302 Ene rgy 916 1.229 859 -9 -7 0 0 Iron O<a 8,861 12,290 11,911 12,495 11,495 10,236 10,317 Others (includes associa1es and .Ns) -681 ·1,070 -1,253 -1,096 -1, 119 -1,143 -954

Total 13,610 18,680 1B,13B 17,811 17,81B 17,571 18,801

jEBITDA m11rgln11%1 Aluminium 26 % 31% 25% 29 % 32 % 34 % 32% Coppe r 29% 39% 43% 32 % 31% 34% 44% Diamon ds 39% 41% 43 % 42% 41% 40% 40% M inerals 24% 31% 28% 35% 33% 34% 34% Energy 29% 37% 59% -2% -7% 0% 0% Iron Ore 56% 6 1% 59% 61% 59% 56% 55% Total 40% 46% 46% 46~ 44!11, 43!11, 46%

Source: Deutsche Bank, Company data

Deut sche Bank AG/Sydn ey

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Rio Tinto

Oyu Tolgoi: Revisiting 2016 site trip learnings - Project now subject to review

Rio put its flagship development project under review with results officially removing the mid 2020s target of 560-600 kt copper production guidance for Oyu Tolgoi underground and conference call commentary also suggested the $5.3bn capex budget is under review.

We look to August interim results for the crucial update. The key issue appears to be the strength of rock mass is more variable than anticipated and we know previously OT was described as having weak highly fractured rock mass - this being conducive to caving but also needing more support and control than similar operations around the world.

From the result update we learnt that :

• The 6 month delay to reach sustainable production announced in Oct-2018 (which pushed it from 01 2021 to 03 2021) management have now indicated this target is again to be pushed out further and is under review.

• The highly fractured rock mass is caving, too well, and Rio now need to review and relocate planned infrastructure that sits below the extraction drives and even the location of the extraction drives themselves - this all being crucial to the whole block cave mine. In the CEO's words "Where are we to initiate the cave?" is under review.

• The plan was to start at panel zero and go north and south concurrently into panel 1 (north) and panel 2 (south). However the new geotechnical information suggests this may not be possible and panel zero may need to be relocated or we think the concurrent caving north and south revisited. This is critical to the economics in our view as it affects the pace of ramp up to full production and in turn affects cashflow and profitability .

• We are therefore expecting a slower ramp up, less concurrent caving initially but a redesign that setts up the mine optimally for the following decades of life after first production. We have always seen the value in Oyu Tolgoi being the extraordinary long mine life and the optionality that provides (i.e. in periods of extraordinary and unexpected high price such as we see now in iron ore, abnormally high profits are possible for periods that boost the actual rather than previously expected return on a long life asset).

■ Of the $5.3bn capex budget, slightly over $3bn is remaining to be spent as of the end of 2018 . This obviously excludes and potential overruns and we currently model over $6bn in total development capex .

We now factor in $6 .1 bn from the $5.3bn previous guidance now under review. Oyu Tolgoi original capex cost breakdown and our updated assumptions are presented below. The underground development cost likely to be increased, while areas of contingency where costs could be decreased are in our view indirect costs, owners costs and other costs. The Concentrator cost is unchanged in our

IZ]


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28 February 2019

M&M - Diversif ied Resources

Rio Tinto IZI assumptions but may be adjusted if the need to expand sooner pushed out due to a slower ramp up of the mine.

Figure 10: Extract from Mine Technical Report - Plan was to start at zero and go north and south. Now it seems the location of zero is under review. Figure 16. 18 Foolprlnl Layout and Current Development In Relation to Major Faults

Source: Campany ds ta - Wi Owl n,Juo{TochnlrnJ /lcpprt. Ckloba( ZJ/.lti.

Figure 12: Oyu Tolgoi original capex cost breakdown and our updated assumptions - underground development cost likely to be increased, areas of contingency are (in our view) indirect costs, owners costs and other costs. The Concentrator cost is unchanged but may be adjusted if the need to expand sooner pushed out due to a slower ramp up of the mine. Component % Cost DBe change New Total DBe

Underground 48% 2,544 1,500 4,044

Concentrator 3% 159 159

Support infrastructure 81¼ 424 424

Construction Indirect 18% 954 300 654

EPCM 7¾ 371 371

Owners cost 10% 530 265 265

Other 6% 318 159 159

Total 100% 5,300 776 6,076

Source: Rio Tinto guidance and Deutsch e 81Jnk es timates


Figure 11: Extract from Mine Technical Report

Figure 16 1 Q lllushation of Panel O - Panel l Boundary

Source:Componydsta- ~~~.!..Z!lH

Figure 13: OT project timelines - being redrawn now with an update due in August 2019 but Rio has now indicated 2023 sustainable production target under review.

Rampup ..,_l'l pl rrun, lkoilr1t!IMnlW'lt6 Dev1lopUOml no&1JOcuro ,._,...,uo operalkm CMnlopuQ...,.. p,1,4.. deomuUt lonQ lerm ptt.,,,e, .,,.~

' '

C""rf""'•'" ~I ~...,~, .. ,,,._nc:i

S y..aPo n :;.,- tte f• ~ ... •-1 :,s,~,,.,.,.._bct,,.,,.,. u r .m.,""'C-d,1

.,~,. '

Cc<-.m,;,nt .t !,, .. h l &.i

••'"""l

Source: Compnny data -~

.,,.,, <--• =~: ~<-<1•.1e1, ...

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Rio Tinto IZI Figure 14: OT capex profile - we now anticipate this profile to be stretched out, elongated, as development timeline extends and overall capex potentially increases.

Figure 15: Oyu Tolgoi capital component budget

Underground capital spend promo• (tW,onl 1.0~, 7%-

11·•• 48%

I I I I I i I I 8% 3%

• Expanslon capital • Sustaining capit.91

Expansion capllal ot $5 J bllllon and 5Uttalnlng capllal of $2 a bllllon lo full ramp-up expoclod In 2027

Source: Company datB - TRO comwnrlHW'MllltioO: Qcrc(Jg,; za, 7

• Underground Components • Supporting infrastructure • EPCM

Source: Compan y data - Rig TJoUJ Qsr•?OtCa:O:S: um WPWlt,Ulao

Revisiting 2016's site trip learnings Oyu Tolgoi after Rio places project "on review"

We last visited Mongolia in late 2016 to review Oyu Tolgoi. At the time analysts came away positive expecting Rio Tinto have layered the capex budget and timeline with contingency, we now see potential for Rio Tinto to be eating into that contingency and timeline . Even if all the work was completed on time and on budget, the geotechnical conditions have driven the need to update the project.

We recall

• The Hugo North underground mine will increase copper production to a peak of 650-700ktpa, equating to one of the world's largest copper mines (definitely Rio Tinto scale project/asset).

• Cost averaging <$1/lb (net gold and silver credits) over the life of the underground mine

• 1st drawbell production was targeted for mid 2020 , with sustainable production expected in 2021 and full ramp-up by 2027 to a production rate of 95ktpd - these targets now under review.

• Shaft 5 (ventilation) and Shaft 2 (main production shaft) are both on the critical path along with temporary crushing infrastructure near Shaft 2.

• The Hugo North deposit is deemed "highly suitable" for caving and "the risks associated with caveability and propagations are considered to be low" due to the high stress conditions and highly fractured rock mass. In fact what we now see is that the caving is more apparent than anticipated.

• The design is based on Codelco's El Teniente block cave in Chile and similar to that used at the Cadia East PC2. This uses two (east and west) draw points and does make automation more difficult but in theory will accelerate the ramp-up and de-risk the cave. There will be a total of 2,231

• Concentrator • Construction indirect • Owners Cost


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Rio Tinto lZI drawpoints across Panels 0-2. This now appears to be the critical item being redesigned.

• The OT orebody does not require any fracturing and has very fine fragmentation .

■ On the 2016 trip, Rio Tinto emphasised that getting ground support right at the extraction levels is the key to success. The need to do sufficient ground support up front is key. This includes includes fibre-reinforced shotcrete, rock bolts, cable bolts, steel mesh, and metal cable strapping.

• The feasibility study assumes that the concentrator is expanded from 100kt to 11 0ktpd (40Mtpa) in mid 2022 to maintain recoveries with the addition of the higher grade underground ore. This is now under review.

• The underground ore is much softer than the open pit ore (currently being mined) and could be much finer due to the high fragmentation of the orebody underground. This appears to have been partially confirmed with the 2018 results update.

■ The higher fragmentation was the reason more mine support costs were added compared to other caving operations, this was said by management to be over $2.4bn in additional cost.

■ Concentrate from the underground is to be cleaner, lower in arsenic, and higher grade than from the open pit.

■ Rio's estimate of $5.3b in nominal terms provided in May 2016 with around 14% contingency built into the cost estimate . We note $900m of indirect construction costs which is potentially an area of cost saving. Indirect costs include: freight cost for equipment, power for 5 years of construction (diesel). accommodation, food, charter flights, and insurance.

■ Operating costs are expected to average US$21/t over the life of mine and within this mining costs expected to average $5.8/t.

Figure 16: Critical and non critical components - Shaft 2 fit out has been more complex than anticipated (particularly electrical) and slowed completion by a number of months.

Figure 17: Key Pathway to Development

Key underground components Noloncrilic■lp111h Nameplate production expected by 2027

I ~- - -■■' ..

■ .

'

.

■

-15km completed

2013

UG Gyrntory Crushers

i'x<lOlllltpli

201\l ~(I/}

85km lo first draw bell

2020

Source: Company dBta -~

-2D0km over life or mine

Conveyor to Surf.ice

li!'.,()Olph

211)1

2033

~ l fv_lty __

Readiness

Lateral Development

Shaft#1

Shaft #2

Shaft #3

Shaft #4

Shaft #5

UG Crusher #1

UG Crusher #2

Conveyor to Surface

Concentrator Conversion

Conslruction Complete

Production

- ~:opmenl - Sustaining CiipH

a v u u ~ u n n N n ~ n Nolle~ lo Proceed

Vod•1cut Access Complete =--I I T--'

• Fits ! Gr.wbell NamEplala

production

Source: Company data - l1i!lJJnto Och--">OllilCiS' WP fH91\'frltition

uclion


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28 February 2019


Rio Tinto

l Figure 18: Representative Block Cave Figure 19: Schematic view of OT Underground development

Plan View

r Conveyor to Surface N

Isometric View

Source: CampAny data -Rio Tlnto Qqf-20 16,p'tp tdPJ/fCStlJJJlJie!J. Source: Campany data - Rio Tlnra 0Fh2Rl61tie t,(o ocsntAtfen

Other Oyu Tolgoi points of note

■ Ownership: RIO fully consolidates OT but has an equity share of 33.6% held indirectly through its 51% stake in TRQ (Canadian listed). TRO controls 66% and the government 34%. While many raise the prospect of Rio acquiring TRQ to gain more of the economic benefits of Oyu Tolgoi, we have pointed out in our research previously that until development and geopolitical risks are lowered we view it as unlikely. Refer scenarios in Rio Tinto Copper Options , 1-Oct-18.

■ Investment agreement: Development on the UG project was suspended in late 2013 due to disagreements with the government over certain terms of the Investment Agreement, capex overruns on the open cut project, and disputes over tax liabilities. These were resolved in May 2015 with the signing of the Underground Plan by the government of Mongolia which included concessions such as changing the Mongolian Royalty, foregoing a 2% royalty stream, reducing the management charge on capex to 3% from 6% and settlement of a tax dispute. UG construction resumed in 2016. Under the IA the government is free carried on capex but must pay its 34% of capex out of future cash flows. The government's interest also accrues at LIBOR + 6.5% and it pays Rio a 1.9% guarantee fee on the debt facility. On our current forecasts, the government will not receive a dividend from OT until well into the 2030s, however , it is receiving a 5% royalty (on gross revenues before processing and freight deductions), over 35% in taxes, VAT and income taxes

IZI


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■ Power agreement: Power Source Framework Agreement between Oyu Tolgoi and the Govt now in place for 300MW power plant majority owned by Oyu Tolgoi LLC situated close to Tavan Tolgoi coalfields. Construction is scheduled to start 2020, commissioning mid-2023 with capex included in guidance. 2019 guidance: From the open pit, C1 cash costs are expected to be $1.75 to $1.95 / lb. Capex on a cash-basis is expected to be $150-1 S0m for open-pit operations and $1.3-1.4 bn for underground development. The open pit is expected to produce 125-155 kt of copper and 180-220 koz of gold in concentrates in 2019.

■ Water source. Processing water is sourced from deep saline aquifers (not potable) under a long term agreement for 25 years. Oyu Tolgoi is located in desert areas.


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2018 Results Recap -Switch to Dividend Returns of excess capital

■ EBITDA: $18.1 bn compared to our $18.5bn DBe and $18.2bn Consensus (Vuma). 1 H EBITDA was $9.2bn.

■ Iron ore inline: $11.3bn against DBe $11.5bn

■ Aluminium a miss: $3.1 bn against DBe $3.5bn.

■ Copper and other were ahead of expectations (see table below).

■ Iron ore unit costs: $13.3/t compares to $13.4 1 H and in 2H 2017 $13/t, 1H 2017 $13.8. Guidance for 2019 is $13-14/tonne where we see some volume offset against the potential for general cost inflation.

■ Aluminium input cost pressures: $460m in total for 2018 compared to $229m 1 H.

■ Underlying Earnings: $8.8bn inline with DBe $8.7bn and ahead of $8.5bn Consensus

■ Dividends: $3.07c inline with our $3.08/share DBe and ahead of $3.03 Consensus. We discussed shareholder return potential in our previous note: Cash vau lt into results , 18-Jan.

■ Payout ratio: 72% which is ahead of the div policy 40-60% in dividends and buybacks over cycle, but consistent with 1 H at 72%. Rio continues to differentiate ordinary from additional returns from the asset sale process and in 2019 we expect continued focus on asset sales even if the majority of what is to be sold has been sold in recent years.

■ Net CASH with liquid investments: $255m in net cash from net debt $5.2bn at June and compares to forecasts -$0.05bn DB and Cons $1.2bn with new lease accounting standards to be implemented (add $1.2bn in the proforma calculation). Interestingly liquid investments are $13.3bn with some to be returned in dividend and tax payments early in 2019. We note a significant $1 bn tax payment due in 1 H 2019 on the previous sale of coal assets in 2018. Pro forma net debt is -$8bn after adjusting for tax, dividends and leases.

■ Capex spend: $5.4bn against guidance -$5.5bn and 1 H $2.4bn. DBe $5.1 bn.

■ Capexforward guidance: unchanged from previous -$6bn and -$6.5bn over next 2 years. New issued capex for 2021 is $6.5bn and includes provision for yet to be approved projects. Approved significant projects at 100% of budget are OT $5.3bn, Kooderderi iron ore $2.6bn, Robe Rive iron orer $1.55bn, Kemano Kitimat aluminium ($0.5bn, Kennecot copper South Wall $0.9bn.

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Earnings changes - minimal (some unit cost creep) except for share count as we remove buyback in place of higher dividend payout ratios We make only minor earnings changes to our 2019/20 estimate following the 2018 results. Production guidance for 2019 was unchanged across the major divisions. Our production estimates are aligned with guidance.

We have increased 2021 capex to $6.2bn, slightly below guidance of $6.5bn. 2021 capex includes an undisclosed allowance for unapproved projects (limited details available at this stage)

We have reduced our buyback estimates for 2019 and now only model the completion of the outstanding $1.7bn from buy back plans announced in 2018. From 2019 onwards, we have increased our DPS payout assumption from 60% to 70%. The increase in forecast number of shares from removing the buyback has cut our EPS estimates relative to unchanged EBIITDA estimates.

I Figure 20: RIO earnings changes post 2018 results update 2018 2019F 2020F

Units Rcporu:,d Old % ch.lngc Nl'w Old % change Nc>w Old % change

fBITDA

EPS

Smn

$/ sh

18.136

5,12

18,490

Source: Deutsche Bank estfmates, Company dam

-2%

Iron ore expansion opportunity:

17,811

4.97

18,045

5.18

-1%

-4%

17,916 17,890

4_89 5.29

0%

-1%

Maintaining a cautious go slow stance and guidance is unchanged for recent incidents . Recall guidance is 338-350Mt 2019 unchanged and this 12Mt range compares to 1 0Mt range guided in 2018, then we model 352Mt 2020, DB 356Mt 2021 then DB 360Mt/yr from then. Previous commentary was rail system will only be at "nameplate" capacity 360Mt/yr by end 2019 and the bottleneck then the iron ore mines . Recall fire at the port of Cape Lambert A on 10 January 2019 affects Robe Valley lump and fines shipments in 01/02 that was taken into account when guidance was issued. We think market conditions are conducive to raising production faster than previously planned and Rio's port capacity does exceed 360Mt/yr.

The range to be determined by: 1) Recovery from Cape Lambert fire after 01, 2) Any weather interruptions particularly during cyclone season early in the year, and 3) Market conditions. The latter now impacted by VALE supply disruption.

Cape Lambert fire early January affects Robe Valley shipments over O 1 /02 (8. 7Mt in 1 H 2018) but the company has ability to make volumes up through the course of 2019 . Importantly for the high/low price spread, at IOC in Canada where higher grade concentrate is produced, guidance is for 30% growth back to nameplate capacity in 2019 (after a strike in 2018).

Is Iron Ore Company of Canada stepping up into supply gap?

This concentrate and pellet producer which is 59% owned by Rio Tinto has already guided for a 30% growth back to nameplate capacity -21 Mt/yr in 2019 of (after a strike affected 15.2Mt of production in 2018 at 6.7Mt concentrate, 8.5Mt pellets). We would not be surprised to see Rio Tinto try to sell this asset in such a strong environment as it did run public sale process in previous years for IOC.


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Cu-gold Potential Discovery - not yet Rio Tinto size but promising Cu-gold Discovery - not yet Rio Tinto size but promising on Patterson province potential

Called "Winu". Mineralisation has been intersected with 1.4km strike, and is close to surface (open pit potential). Excellent relative geopolitical location being located in Western Australia is excellent from a relative risk point of view but remoteness means it is unlikely to be low cost. Early suggestions are that if further drilling warrants development, it could be sequenced with Oyu Tolgoi and Resolution. This is early stage deposit and described by Rio Tinto as pre-discovery.

From our calculations at this stage it does not seem to warrant world class size potential given the grades but there is extensive drilling to occur through 2019. On our tables below, the average Cu equivalent is 0.6% and the intercepts do not yet make it on the ladder of world class deposits released by copper explorer and potential takeover target of SolGold in which BHP holds 11.2%, Newcrest 14.5%.

The closest copper/gold mine to Winu is Telfer which has 0.87g/t gold, 0.19% Cu Resource - 0.76% Cu Eq, higher than our current calculation 0.6%. We will look to further drill results potentially later in the year.

I Figure 21: Western Australia copper-gold potential discovery Early success In copper at Winu• : - Copper -gold m1neralisalion intersected

- Mineralisation close to surface 50-100m

- 1 4 km of strike length open to North South and East

- Localed in Western Austrahc1 and 100% owned

Extensive dnl1ing to continue in 2019

- High quality exploration targets emerg lng

'fc• ~ ,..-.~h ·JT"'<"'-'"<• ~,4~~ ,t.,,,.,,1]1 J.-t.,,_-..-, .'Ql'I, H,o , ... ~. •J\COl<t> \;j.J..t <1'!, ... •)·•.1•,~;,-VA<o~i,-o,sj .. 1'_,pJlt<••"'""-"''"''"!U,O>I M"'~ '"?'-" cHV..-..... " ............. , ,-,, .i,,_, ~~,..•J ""'-•~_, ,..,...i,,-1,,.. _,,, ,,~_.,.. < ....,,().., r.lc:.c t ch.-•'-~ n n-...1,.,,,. • ..,........,c<-lel.:Alr,.~•>Joilf•1'v"'., 11-.,h ~7•R=••.,..,..J(,,.1t,-_.,.,..~11w-.,:~:eo~ :>01!£0....,, lt.;-,..,..,r.,.~••r

Source: Campany data - R,o (irzrp2Ql8mwfttecr-1t0Catfon

I

I Figure 22: Rio's last major discovery was in coal in 2015 Selected Rio Tinto dl1cov1ry-l'il1i1Jtlig hl9 . Sl!ll"tllc.Yld-soo,eP U tlP ew ---..&4t • Four. .. "l) 01,<o. e ,nkwh1proc!'.t1:IO,(il;p i • 0 4<0tHI H m11,b1119p;oet.CIQIOIJPS

Source: Company data - Ilia Tftrtq P«'V/U p®Q 7%9:ZPIB

SECTION 1

•

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J Figure 23: Our Cu equivalent estimate on Winu = 0.6% Cu From To M Cu% Aug/I Agg/1 Cu$/! Au$/! Ag$/! cu Eq (%) m% CuEq

WINU0004 88 233 145 0.43 0.48 3.09 27.5 20.1 1.6 0.77% 111

WINU0006 46 809 763 0.44 0.65 2.88 28.2 27.2 1.5 0.89% 677 WlNU0007 318 663 345 0.41 0.31 2.68 26.2 H.O 1.4 D.6l% 219

WlNU0008 96 358 262 0.27 0.3 1.61 17.3 12.5 0.B 0.48% 125

WINU0009 104 326 222 0.2 0.18 1.4 12.8 7.5 0.7 0.33% 73

WINU0009 338 662 324 0.25 0.16 1.48 16 6.7 0.8 0,37% 119

WINUOOlO 109 474 365 0.27 0.24 1.64 17.3 10.0 0.8 0,44% 161

WINUOOll 276 775 499 0.4 0.2 2.33 26 8.4 1.2 0.55% 274

WINU0012 94 396 302 0.25 0.27 1.55 16 11.3 0.8 0 .44% 133

WINU0013 215 687 472 0.43 0.35 2.69 17 .5 14.6 1.4 0.68% 321

WINU0014 185 377 192 0.4 0.17 2.69 25.6 15.5 1.4 0,66% 127

WINU0015 94 496 402 0.24 0.18 1.18 15.4 7.5 0.6 0.37% 148

WINU0017 326 522 196 0.46 0.23 2.6 29.4 9.6 1.3 0.63% 124

WINU0018 213 456 243 0.36 0.21 2.25 23.0 8.8 1.2 0.52% 125

WINU0019 100 204 104 0.57 0.56 3.37 36.5 23.4 1.7 0,96% 100

WINU0024 97 258 161 0.57 0.46 3.25 36.5 19.2 1.7 0.90% 144

Average 0.37 0.32 2.29 23.8 13.5 1.2 0.60%

Copper price Gold price Silver price

USD/t(oz) 6400 1300 16

Source: DeuUchc Bank calculati'ons based on Ri'o Tinto exploration announ cement 27-Feb-2018

J Figure 24: World Class Copper discoveries

Ranlc LocaUon lntnvol Cu Au Cu.Eq m,.

Oper•or Property /ml ,,., la/II ,,.1 Cu[q

I A.,,•loAmc,,,lnln I.a\ ~ulOh.'tlO\ C!l'lU,UCJ•II~ 'l : ✓, O J .to o.oo 1 . ,0 1 ) O<IOffO (hitll'UI G~Anh NO•H HtlA ( lulu unlinow n u11•nown u r11\110'Wn unll.now-n unlinown 1 «toruiH( U t Qln.~am G111von Ul,._,~, U'IA on1r.nuw,, un~uown untu \OWl'I UJIILMwO un ~t~"n

• •4.rwun • M lrunm \1/.afi Oolpu P:tnu.a N..w (n.1lt1,,1 , .,., , s ..... O.M ,.,.. - •ms . Nl'WtU"'\ 1 "-,i lnt.nir WiJ I lJOIPU P4pu• Nrw uu1n,r,• 9 4' > l ,44 ,., .. ,.u --·· r. lmt1e11al Mr,lal, Red Ch11~ BC. C•n."ld,1 J0.140 J .01 1,J (; ..• , ~ 1 1150 > At UlfO Ginh t A '\hWltt Nu wOCh.M11 .n16 C!)40mbia . ,oo 1,6' 0.7■ ..... ··11:u . • I r (l('pOI I M (l.101.M'I G 1•1.t1tlf• wanux,11 S9 l .O 1.10 , •• o J ••• J U I

• tvr,1.nhnllll Mu ..,_ O yv t (lil11tot SU411U 1CtfA M o,111ui1<11 ~}tJO J . 17 I .U ..,\ J.!l fl)

10 :\OlholtJ l 'lr. (,~llll'Jb,>4 lfOln i J [(t>.ildCW l 'li(,QO O.SB O ,S-4 o.~, l lll~S I \olGe:,ltJ rh t,nt•b"" H uitt? fn1,111do• J , .,., .. 0 .61 0 .1 1 • • • 6 1..J H:),

11 l .n:i'll'l't "tf\OtlCCf'\ c .n~ch• Nol CtMt•" Ctur\) J..IJ4.0 0.00 O.J3 l . ll 1-J4l>

tJ ~1Gold1 11t: (.:.au.tb«I l!olr, 1,/ l<t ; 4dtt4 laJ•O 0 . 1.J O.'tl 1.1'!1 U l6 14 \.01<,old s•1c , .. u·,.-11.t Hole•~ iOJ.ld{M f lj,,YU 0 .6.1 o.n , 0 . IJ4 1 .UQ ,s M M•lbtdi U M risrri l • f o 1t u n.a ctul" 1BOO 0 ,114 J . 24 , •• J U b6 16 )OK)Old Pk CiAU.;ib.t U Ol41 l G fcu;1 1lu, ~Ho.O O.U 0 .1 , I.JS J 26G ., lt.ft.l lO Am rttk:.at\ l o, !.utnh.AICH (cnu••tt1lle 9!JO.O l , J6 0 ,00 1, ;H I J 41 ,. hl~OhlDCl'MIOlt\, O,v 1otao! i.OUlh-c"ln MOfHt:Oh.l .,,,u, J , l6 0 ,67 J:.S,I .U lO

19 S.OIGotdrll (,u.u~M fl nln ~1 Ccu•dot 1_)/~" u ,. n •,~ 1 ,. l :ZI I 2n '.QICioW ft lc (•,uibirl Hulo "" fr.\.,.dor ~HJ, 0 ,. ""' 1" 12 08 ,, \c'l,lr , alrtflt t: CAHilhet t lot,, JUI frua110 , IOU J Q Q')"J 0•JO I lo J.1 0~

» M~ h1111ir .. !IMr,uo l'-f' fl•1Un41 .. t\1111' n,tHJ O.fJl o.,,, LS• 1 110 n tl'~"'GJPlt C.11d1.-,odaaw.av HSYI , Au, II .th• J41 IJ OJ/il l J.~I G J ~!17 11 .\t) ,. h1.,1r'lhOtt Mh l4."\ uu aooumm1111 \aoltwrtn -ton•ot 1,111 .JOlO J .. U o.9■ J . 7t U l(i ,~ h'AnhoeMlne, °'-'" totao1 ~the,n M Or'l;Oh4 -4110 ..... O . JI J .11 1 10) ,o 1o~Pk 1c .. 1<.o111.ie4 uot• •.~u rcu ,11Jot 10610 o.,, O, Sl l , OZ I DRJ 17 '\oli.ooki l'k l~1C Al 1f'1 J(Oh• ~H Lil I (1.1.adOI' !'11111 0~7J 0 .16 , .oa IOOJ ,. !.OICiofdl•'<: tJ'\(Abt-1 II Ol!f J•., lCv.1dOf' J 9J8'J ... 0 . 1•1 OU I OI/ ,. '\of(ulf'LI 'f(' (..11'\{Ab•I Holvtn, (cu111J01 ~..,o 0 .11 I .OJ I . U I OU, 10 fnUt,tlf.lllf\; 1fliti,llt. d ,t(JCIUl, C1.1r'l'6• JI JSO o.,:o O. l 'fll 0 . 1'1 991

" "1"1~• llu111ou,o•" dlOIChw tnn:hl(!,,. C"hllft' I O"iiRO 0 ,10 o.u 0 ,9 2 '"~ " •.o1~0k1 Jl'II" 41l(·.,.t>.,1 I IOlt• l f.oNJ [(.lJ .. dOil I .J t; JU o.•• ..... o.,., 9}4

11 · ..... ,, Mmourc(il,. C ,n.nk fHIIP N o 1, ~,n Ch dc, ./91 S o.ou. 0 ,40 1. 21 Uul .. ,nu.o.,i Mn•, 'H.iMJChJ t\ . can,ulll 1 lb ...1 O.>• 0 , 14 1, 1 6 tl0 1

" th tv u 1r t,,nM, iv,b1.1 l ?/10 0 .110 O, ll l , U ••o ,. '\vlUOldPk C.aU:...bt"f ll oh• 1/ tn,lld~ • ,,. .. a 0 .6<1 O,SI o.,, ••• ., \()ILClldf'lr CAUAb.-i Uol" 11 r c'J.-dOt 9.u,v O.GJ 0 .19 o.,u ~n l8 M,,,unllC'.1 fl M nt rn l.A fur , .... C'.h d• aHJ .O 0 . 59 o.,i 1,03' ~-, ·~ ".Olftold rrt, f 1.ur11bff t1or.-1'l tfUOc.JDf

f '"" 0 0 ,"4 OU 0 6) 8l?

•n \,olf1t111$t 11< C.aUJ IH"I H ol" 1n l h1.1th11 ,u....,u O, S, 0 ,61 o.tt• 81:. ., 5.o.;,ibddn.fl' Gnto I I\C ..... ,an.aQ!ll 101-'" 0.24 o.,, 0,71 , .. NORI •c.cJld (0 11' ... ltiDrl rat100 l,lf Ol>l (~l <.IJl .. ll!'rt loom ,1 ("O~PI l"H l( I" o l l~~l (l.l/lb Mid •1110111 fl'''"" l /\S I ll'JO,lo, ,,u .. Wldlh\ ol ,.h.MHtio4r

1,,1 .......... to .. ,. , h, •••• u ...... 1 .. 11 lu II,, .appi O .. UYl .. 11 J">"- ,n {,O,C. Soi,ir'C•I \ .,.,.,.,,,..,,,,_."-' illl 10 111 ,,. .. , 101.n 1n u '>p .ao111.,tr.a1.,-1 • bu 1 ,.,, •rp, ·).lh

J1'11t'llol IO•IO , l11f o ,1111Wo l01fl

Source: Comparry data - Sf>!Ci9/dmnsfl0Wion /-rk201 9

Supplementary additional shareholder returns: $7.2bn in total but $4bn special dividend or 243cps (October 2006 was the last time we recall Rio Tinto paying a special dividend) . While $1.1 bn previously announced buyback continues through to Feb-2020 the preference appears to have switched to dividends to return additional capital which we think helps return funds and franking credits sooner, and helps not push key shareholders up the register (recall the largest holder owns -13.1 % of Pie shares equating to


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Rio Tinto

around 9% of total group shares) and is approaching the previously approved limits of 15% of Pie as set by the Australian Treasurer in 2008 when approving the foreign investment.

Productivity - a different view on the previous target $0.4bn "exit rate" at year end affected by higher costs and raw materials (inflation) . This compared to target of $1.5bn by end 2021. The $5bn cumulative target from 2017 to 2021, in our view, appears ambitious as inflation is returning to the industry and this report suggests Rio is finding it difficult to meet the stretch target. By changing the method of presenting the productivity target we think Rio Tinto more or less walked away from the previous sum total target, but is replacing with continues to target areas to reduce cost.

Aluminium - focus on cost rather than expansion Aluminium smelter expansions? Cautious tone suggests Rio is holding off for now . Has been discussed and highlighted by Rio Tinto for 18 months, Arvida the likely smelter to be expanded when the time comes . Aluminium missed expectations with $3.1 bn underlying earnings against DBe $3.5bn. The widely reported input cost pressures amounted to $460m in total for 2018 up from $229m in 1 H.

At 3.5Mt the company met the top end of 2018's revised guidance range 3.4-3 .5Mt, which was downgraded in 03 due to labor disruptions in Canada. Aluminium production guidance for 2019, is for 3% production growth from creep capacity increases adjusting for sold assets. Realised prices were higher at $2,470 (2017 $2,231), including value-add premium on 57% of volumes averaging $224/t in addition to the standard physical market premium $419/t in 2018 ($199/t 2017).

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Assessing the upstream dam risl<s to Brazil's iron ore production Extracted from note published 14-Feb

Suspended iron ore production capacity now totals 58Mty in Brazil We estimate a total of 58Mty of iron ore production capacity is currently suspended in Brazil following the tragic dam disaster. Two-way risks remain -further suspensions from the authorities could be enforced, although equally the Brucutu suspension may be lifted as it is not exposed to an upstream dam. PreBrucutu suspension, we discounted a net 1 0Mt output loss for Vale in 2019, with their ability to offset a portion of losses with 50Mty spare capac ity key. Under that base case scenario we forecast a 29Mt global seaborne surplus, with expectations for a descending price path through the year (DBE 62% iron ore USD 68/t).

Dam database points to limited upstream-related supply risk beyond Vale One key focus from has been quantifying the production risks from a potential move by Brazil's National Mining Agency (NMA) to ban all upstream tailings dams. We have done a deep dive on upstream dams in the iron ore mining sector in Brazil and have a database of the dams (available on request) . Whilst there are just over 35 upstream dams related to iron ore mines in Brazil, beyond Vale, we estimate the production at risk to be at most 20Mty. Vale have 40Mty of output at direct risk if they deploy their 3-year dam decommissioning plan, with 13Mty at Vargem Grande already suspended as part of this strategy .

Sharp w/w drop in Brazil shipments mid-month, China mills buyers strike The first set of Brazil shipment data covering the two week period post-Feijao has failed to offer much indication of impact on export volumes. Volumes dropped m/m into February but that was seasonally expected and are still up 30% y/y. Australian shipments have also risen firmly, likely reflecting a recovery in shipment post-Cyclone Riley rather than opportunistic flex in volumes. Either way, with high inventory cover, weaker margins and sluggish steel demand, China's mills have signaled limited buying appetite in the near term.

Iron ore forward curve pointing to USD 70/t as the new norm? The path for iron ore prices in the short term will be largely dependent in our view on news flow regarding the NMA's policy response, the sustainability of the Brucutu mine suspension and Vale's spare capacity ramp-up. If the risk of further incremental supply cuts starts to rescind then, we would expect the moderation in prices to continue in line with our full year forecasts. Until the authorities response is evident, it is too early to argue for a 'normalisation' in pricing to occur, as reflected in the forward curve trading above USD 70/t until mid-2020.

Suspended production capacity now estimated at 58Mty

At the current stage in proceedings in Brazil, we estimate that a total of 58Mty of iron ore production capacity is currently suspended (1.2Mt per week) following the tragic dam disaster. The key development in terms of production loss was the


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unexpected suspension of Brucutu mine (35Mty) by the authorities. The operation does not have an upstream dam and Vale believes that whatever the motivations for the suspension, this asset should not be taken off-line on a safety basis. In this context, there remains a risk that Brucutu could be restarted . Vale themselves have so far only suspended production of 13Mty at their Vargem Grande complex as part of their dam decommissioning plan. (see note) alongside 8Mty of directly impacted operations at Feijao.

We estimate the current lost volumes are distributed between 41 Mty 65% fines, 7Mty 64% lump and 1 0Mty 67% concentrate (for pellet and sintering feed). Before the suspension of the Brucutu operation, we assumed a relatively limited net 1 0Mt production loss (29Mt global seaborne surplus 2019E). Importantly , Vale have consistently stated that they have flex to bring 50Mty of spare capacity into production, which should offset a large portion of lost fines/lump output . If the authorities lift the Brucutu suspension and no further closures are announced then our base case projection holds, namely for a descending price deck over the full year (DBE 62% iron ore average USD 68/t in 2019)

Dam database points to limited upstream dam supply risk beyond Vale One key focus from investors has been quantifying the production risks from a potential move by Brazil's National Mining Agency (NMA) plans to ban all upstream tailings dams. We have done a deep dive on upstream dams in the iron ore mining sector in Brazil and have a database of the dams (available on request). Whilst there just over 35 upstream dams related to iron ore mines in Brazil, our analysis indicates that beyond Vale, the production at risk would be at most 20Mty. Vale has the most exposure to production volumes, with 40Mty of output at direct risk if they pushed forward with their dam decomissioning plan (although broader complexes production exposures amount to 80Mty). Until the NMA clarify their plan, we think the potential for iron ore to sustainably move lower will be limited .

IZ]

Figure 25: Estimated current total iron ore production cuts in Brazil since the Feijao dam disaster

Figure 26: Vale iron ore shipments rose firmly y/y in first 2 weeks of February (weekly, 10,000t)

40,0

35.0

30.0

25.0

20.0

15.0

10.0

5,0

0.0

Mt

Brucutu -,..--...- ~

Vargem Grande Paraopebas Complex Serra Azul Complex (Feijao + Jangada)

• Iron ore cuts

Source: Deu tu:hc Bank estimates. Vale estimates

Brazil iron ore shipments rose y/y month to date,

- Brazil Iron ore shipments

Source: Deutsche Bank estimates, WIND

The first set of Brazil shipment data covering the two-week period post-Feijao has failed to offer much indication of impact on export volumes. Vale's shipment volumes actually rose initially 10% w/w from mid-January to early February (which we assume reflects ore already at port), however then fell 20% w/w over the first 10 days of the month to the lowest shipment volumes in 12 months. At an individual port level, the data showed sharp sequential drops at Tubarao port (where Brucutu volumes are transported) and Guaiba Island Terminal (where

- Vale Iron ore shipments


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Rio Tinto

both Paraopeba and Vargem Grande ore is shipped). However, February is the seasonally weakest period for Brazil ore exports (so a sequential decline would be expected) and Vale's shipped volumes month-to-date are still up 30% y/y.

The shipping data therefore has offered no immediate evidence for bulls to cite on tightening effects. We would expect to see more impact on shipment volumes into March given the timing of closures (Vargem Grande on 4th February and then Brucutu on 5th February) as well as lags in ore shipment from mine to port. The unknown levels of stock buffers on-shore combined with Vale's spare capacity flex do offer clear risk of disappointment on the degree of shipment decline. We also know that Vale built inventory strategically in 2017/18 as part of expansion in their blending sites in China and Malaysia. The stock volumes are unknown but Vale may choose to destock at current price levels and then rebuild inventory in a lower price environment.

China's mills buying constrained post-CNY, lower grades benefitting Early feedback from China post-CNY suggests that mills will attempt to hold off buying iron ore until March given high inventory levels, still sluggish steel demand conditions and an aversion to current price levels. China's imports of ore are unlikely to diminish in the near term given shipment data so far in February for both Brazil and Australia (y/y growth as noted), as well as the lags in shipment time (40-45 day voyage from Brazil to main ports in China). This suggests that even if Brazil's production losses mount and shipments do fall from mid-February onwards as a result, the compression in China's import volumes would not be visible until the second half of March at the earliest . China's weekly iron ore trade data showed total volumes rising 6% y/y during the first 10 days of February following on from an 8% y/y rise in January. We think that port ore stocks should start to build into March on that basis, which could be negative for pricing.

IZI

Figure 27: Front end of SGX curve increased significantly, more modest back-end increase

Figure 28: Significant net long positioning in market creates long liquidation risks to price now

90 SGX 62% iron ore forward curve

BS

BO

75

70

65

60 '---~---~~~- -----123456

- 2/12/2019

7 e s 10 11 12 13 14 1s 1s 11 1s 19 20 21 22 23 2◄

- Jan-19 -Dec-18 2016 Ave

Source: Deum:hc Bank esh"mates, Bloomberg Fin1Jnce LP

Deuts che Bank AG/Sydney

2350000 - Dalian iron ore open Interest (lots, LHS)

2100000

1850000

1600000

1350000

1100000

850000

sooooo .... 1 ----May-10 Jul-18 Aug-18 Oct-1B

Source: Deuache Bank estimates, Bloomberg Finance LP

- Dalian iron ore (RMB/I)

1

690

Nov-18

640

590

540

490

---~ 440 Jan-19

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On-shore pricing trends since CNY have shown a narrowing in marked grade spreads. The most significant move has been in the 58-62% fines discount, which has narrowed to the lowest spread in percentage terms since October 2017. Despite the disruptions in Brazil being in higher grade iron ore products, the premium for 65% fines (over 62%) and lump have both narrowed so far this week . It is early to take a concrete read on these trends but it would appear to suggest that in an environment where a lower level of average mill margins is expected (versus 2018), there has been a shift towards increasing the lower grade proportion. On-shore scrap prices have also risen versus January, suggesting some shift towards increasing usage after a drop-off in 04.

Iron ore forward curve signaling USO 70/t as the new norm? The path for iron ore prices in the short term will be largely dependent in our view on the NMA's policy towards upstream dam decommissioning process as well as the sustainability of the Brucutu mine suspension. Developments in regards to either could trigger material price moves. Whilst our base case remains for a relatively modest 10Mt net loss in Vale's production this year and subsequent moderation in iron ore prices, there is no doubt an elevated risk in the current environment of fresh developments changing the course for prices . The 'bullish' scenario would be the NMA ordering broader upstream dam-related production closures and not lifting the Brucutu suspension - these developments could see iron trading back towards USO 100/t level. Equally, the 'bearish' scenario would be the Brucutu suspension being quickly lifted and Vale not suspending other production - this would likely drive a move below USO 70/t by 02 .

The best signal the market has on where price expectations currently are is in terms of the forward curve . The SGX 62% iron ore forward curve is in steel backwardation (signaling current prices are not sustainable) but equally, the curve is currently trading above USO 70/t until mid-2020 and then only moderates to the mid-60's by 2021. Is the market correct to discount such a strong price environment for the next two years? Uncertainty over the authorities and the impact of this supply risk premium on price justify that forward pricing. However, unless we see further incremental cuts in Brazil, we think on balance the forward curve remains too high. At current price levels, there is a high immediate incentive for inventory along the supply chain to be liquidated as well as a signal to stimulate supply responses from higher cost producers. There is also likely to be some negative impact on mill demand, with margin pressures supporting a shift to higher scrap usage a potentially important adjustment.

IZI


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Rio Tinto

Iron ore marl<et trends in 2 pages ...

Figure 29: Current total iron ore production cuts in Brazil since the Feijao dam disaster

Ml 40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0 ---'■'-----------~ Bruculu Vargem Grande Complex

Paraopebas Complex (Feijao + Jangada)

• Iron ore cuts

Sourco: Dautsche Bank estimates, Vale estimares

Serra Azul

Figure 31: Ships departing Brazilian ports have fallen to 12 month low, flat y/y (weekly)

70

60

50

,o

30

20

,o ----="""-------........ -........ ••vvvvv~~~~~~~wwwwwwww~~~~~~~mmmmmmmm

~~t~18~~ji~18i~it~~i~~~if~i8~~~!~1ii~ ■ Total no or ships departure lrom Brazil• Iran ore

Source: Ol!lUtsche Bank estimates, WIND

Figure 33: Inventories in China remain high to buffer impact when/if shipment volumes are impacted

180

160

140

120

100

80

60

40

20

lnvenlory of Imported Iron Ores at Ports, Mt

M~MMMMvv•vvvv~~~~~~~~~~~~~~~~~~~mm~mmm

i;_' ::,_.J. O.> C .!. :l,.C Cits' O,h .!. i!: .i..n: 6 ~ .!. :l,...!. I}.> 6 .!. >-"3 D.> 6 .!. :l,.C Cit) 0 ~if~~~~~~~~o~~i~Io~~~i~~~~~~,~~~~~~~o~

■ Auslralia ■ Brazil • Olhar

Source: Deutsche Bank estimates, WIND


Figure 30: Vale iron ore shipments rose y/y in first 2 weeks of February (weekly, 1 0,000t) 1,050

950

850

750

650

550 1111r ,1 .111rv ·n. •• 11w111111

450

350

-- Brazil Iron ore shipments

Sourco: Deutsche Bank estimates, WIND

-- Vale Iron ore shipments

Figure 32: Australian iron ore shipments up -15% y/y so far in February (weekly, 10,000t)

-- Auslrallan (BHP+ Rio+ FMG) Iron ore shipmenls

Source : Dcuttche Bank estimates, WIND

Figure 34: China's mills are holding relatively high iron ore inventory after restocking early in the year

40

l 35

,8 30 0

~ " 25

t i 20

15 ,_ ________________________ _

l\'l, "'l, ~I\", ~""':, d.._n;, ~~ ,¥~ -;K.._<t, ~"'-) ~•fo fi"'c ~t0 ~ .._'b ~.,_'b .... ~ '<.JI ":,¥ ')'Ii 'S Qer 'Jv ~o ~ 0r.; ~q c;,_,~ ~'lJ .,.-.f:6 «.Ji ..,v ..,,,,.<1

-- Imported Iron Ore lnvanlory (In days)

Source : Deul3che Bank estimates, WIND

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Figure 35: We now expect minimal seaborne supply growth in 2019, risk remains of further cuts

Ml

180

160

140

120

100

80

60

40

20

2014 I~ I I 2015 2016 2017 2018e

• Global seaborne supply growlh {by volume)

Sour~: Ot,um;he Bank estimates, Wood Mackenzie

-2019e

Figure 37: Forward SGX iron ore pricing strongest sustained environment for 62% since 2014 ... 140.0

SGX 62% average 1 year and 2 year average forward strips

120.0

100.0

80.0

60.0

40.0

20.0

-20208

ii t~l l i ii ~li lil~lil~i~slli!~lli - 1-12Maverage

Source ~ Deutschtt Bank estimates, Bloomberg Finance LP

Figure 39: Significant net long positioning in market creates long liquidation risks to price now

2350000 -- Dalian iron ore open inleresl (lots, LHS) -- Dallan iron ore (RMB/l) 690

2100000 640

1850000

1600000 590

1350000 540

1100000

490 850000

600000 !.., ___ ~--------~---~~ May-18 Jul-18 Aug-18 Oc1·18 Nov-18 Jan-19

Source: Deursche Bank estimates, Bloomberg Fi'nance LP

Figure 36: Impact of Net Vale cut scenarios on iron ore balance

90

80

70

60

50

40

30

20

10

0

-10 20198

■ Base case

Seaborne Iron ore market balance (Mt)

20200

■ Nel cul 40MI

Source: Deutsche Bank estimates, Wood Mackenzje, Company Data

2021e

■ No net cut

Figure 38: Front end of SGX curve increased significantly, more modest back-end increase

90 SGX 62% iron ore forward curve

85

80

75

70

65

60 1-~------~~· 1 2 3 4 5 6 7 B 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

-- 2/12/2019 -- Jan-19 --Oec -18 --2018 Ave

Source : Deutsche Bank estimates, Bloomberg Finance LP

Figure 40: Lower grade spreads has firmly narrowed from mid-2018 to current

40

30

20

10

-10

-20

·30

·40 Nov-17

-- Iron 58% (high alumina) versus 62% discount

-- Iron 58% (tow alumina) versus 62% discount

-- Iron 65% versus 62% premium Jan-1B Mar-1B May-18 Jul-18 Sep-1B Nov-1B Jan-19

Source : Dcursche Bank estimates, Bloomberg Finance LP


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Rio Tinto

I Figure 41: Seaborne Iron Ore Supply Demand model Seaborne Exports 2014 2015 2016

Brazil Mt 401 417 409 growth % 8% 4% -2%

Auatralla Mt 747 800 861 growth % 24% 7% 6%

South Africa Mt 63 61 68 growth % 11% -3% -5%

India Mt 0 2 16

growth % -100% 0% 667%

South Eaat Asia Mt 17 0 0

growth % -55% -100% 0%

Middle Eaat Mt 17 9 14 growth % -18% -46% 50%

South America ex Brazil Mt 29 29 32 growth % -3% 1% 10%

Europe Mt 27 23 23 growth % 4% -12% 0%

Africa ex South Africa Mt 37 20 21 growth % 9% -47% 6%

Other exports Mt 36 67 64 Total Traded Iron ore aupply Mt 1,374 1,418 1,477

growth % 14.1% 3.1% 4.2%

Seaborne lmpons 2014 2015 2016

China steel production (crude steel) Mt 865 844 883

Chine Hot Metal (BA Ml 761 764 782 growth % 7% 0% 2%

Chine Mt 924 1033 1101 growth % 23% 12% 7%

Japan Ml 140 136 134 growth % 0% -3% -1%

S. Korea Mt 78 79 77 growth % 14% 2% -3%

Taiwan Mt 24 24 26 growth % 8% 0% 4%

India Mt 2 0 0 growth % 0% -100% 0%

South Eaat Asia Mt 0 0 0 growth % 0% 0% -6%

Europe Ml 123 122 119

growth % 1% 0% -3%

01her Imports Ml 6 24 27

Total traded Iron ore Imports Mt 1,296 1,418 1,483

growth % 20% 9% 5%

Notional market balance Mt 79 -1 -8 China Imported fines (62% CFRl USO/I 97 68 68

Source : Deutu:he Bank estimates, Company Data, Wood Mackenzie


2017 2018e 2019e 2020e 2021e

434 446 460 456 484 6% 3% 1% 1% 6%

874 894 899 909 926 3% 2% 1% 1% 2%

61 67 66 66 66 4% -6% -3% 0% 0%

18 0 0 0 0 20% -100% 0% 0% 0%

0 0 0 0 0

0% 0% 0% 0% 0%

18 16 13 6 4

31% -12% -20% -56% -28%

31 31 36 39 40 -3% 2% 13% 10% 2%

23 22 25 26 27

0% -5% 10% 7% 4 %

22 20 19 20 20 5% -9% -4% 3% 0%

60 66 62 62 61 1,642 1,542 1,558 1,573 1,617 4.4% 0.0% 1.0% 1.0% 2,8%

2017 20188 2019e 2020e 2021e

875 923 937 952 947

796 793 787 784 776 2% 0% -1% 0% -1%

1130 1132 1132 1133 1122 3% 0% 0% 0% -1%

131 130 130 130 130 -2% 0% 0% 0% 0%

78 78 78 78 78 1% 0% 0% 0% 0%

26 25 26 26 26 0% 0% 2% 2% 0%

0 3 6 7 9 0% 0% 69% 35% 18%

6 8 13 18 21

929% 82% 58% 33% 20%

121 123 123 126 127

2% 1% 1% 2% 1%

26 24 21 19 18

1,614 1,522 1,529 1,536 1,630

2% 1% 0% 1% 0%

28 20 29 36 86

71 70 68 84 60

IZ] 2022e 20238 2024e 20258

490 488 483 478 1% 0% -1% -1%

921 934 934 932 -1% 1% 0% 0%

66 66 66 63

0% 0% 0% -4%

0 0 0 0

0% 0% 0% 0%

0 0 0 0

0% 0% 0% 0%

3 2 2 2

-32% -11% -12% -14%

40 40 40 39 -1% 1% -1% -1%

26 26 26 26

·6% 0% 0% 0%

20 20 20 20 0% 0% 0% 0%

63 63 55 47 1,617 1,628 1,614 1,597

0.0% 0.7% -0.9% -1.1%

2022e 2023e 2024e 2025e

943 938 933 928

768 760 751 743 -1% -1% -1% -1%

1109 1096 1083 1076 -1% -1% -1% -1%

129 129 127 126 0% 0% -2% -1%

78 78 78 78 0% 0% 0% 0%

26 26 26 26 0% 0% 0% 0%

6 6 13 20 -35% 1% 125% 55%

26 27 29 30 20% 6% 6% 6%

128 128 130 130

1% 0% 1% 0%

22 22 16 9 1,523 1,612 1,501 1,493

0% -1% -1% 0%

94 116 114 104

60 62 84 65

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Rio Tinto

Model updated: 27 February 2019

[ Running the numbers

Australasia

Australia


I Rio Tinto

Reuters: RIO.AX

I Hold

Price (27 Feb 19)

Target Price

52 Week range

Market cap (m)

J Company Profile

Bloomberg: RIO AU

AUD 95.12

AUD 82.50

AUD 69.68 - 95.13

AUDm 155,410 USDm 110,932

Rio Tinto is a global diversified mining company with interests in aluminum, borax, coal, copper, diamonds, gold, iron ore, tilanium dioxide feedstock, and uranium. Rio Tinto's key mining operations are localed in Australia, Mongolia, South Africa, South America, the United States, Europe, and Canada,

r Price Performance

1:~ I .. -~v-r-.1 ::;•'¥'C'"C''\ ----s--Jul '17 Jan '18 Jul 'l a Jan ' 19

- Rio Tinto ALL ORDINARIES (Rebased)

I Margin Trends

~tJ+· 1 I I J 16 17 18 19E 20E 21 E

EBITDA Mar~in + EBIT Margin

[ Growth & Profitibility

-~ltf I !IE 16 17 18 19E 20E 21E

Sales growth (LHS) ... ROE (RHS)

[ Solvency

.:J1ktf f¥ 16 17 18 19E 20E 21E

Net debt/equity (LHS) + Net interest cover (RHS)

James Gurry +61 3 9270-4104

[email protected]

Fiscal year end 31-Dec

J Financial Summary

DB EPS (USO) Reported EPS (USO) DPS (USO) BVPS (USO)

J Valuation Metrics

Price/Sales (x) P/E (DB) (x) P/E (Reported) (x) P/BV (x)

FCF yield (%) Dividend yield(%)

EV/Sales EV/EBITDA EV/EBIT

J Income Statement (USDm)

Sales EBITDA EBIT Pre-tax profit Net income

J Cash Flow (USDm)

Cash flow from operations NetCapex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital

J Balance Sheet (USDm)

Cash and cash equivalents Property, plant and equipment Goodwill Other assets Total assets Debt Other liabilities Total liabilities Total shareholders' equity Net debt

I Key Company Metr ics

Sales growth(%) DB EPS growth (%)

Payout ratio(%)

EBITDA Margin(%) EBIT Margin(%)

ROE(%)

Net debVequity (%) Net interes1 cover (x)

I DuPont Analysis

EBIT margin(%) x Asset turnover (x) x Financial cost ratio (x) x Tax and other effects (x) = ROA (post tax)(%) x Financial leverage (x) = ROE(%) annual growth (%) x NTA/share (avg) (x)

= Reported EPS annual growth (%)

2016

2.84 2.57 1.70

21.84

1.9 12.7 14.0 2.0

9.0 4.7

2.5 6.8

11.1

33,781 12,260 7,466 6,343 4,617

8,465 -2,658 5,807

0 -2,725 -4,948

701 -1,165

-719

8,201 58,855

951 21,256 89,263 17,788 25,745 43,533 45,730

9,587

-3.0 13.2

66.2

36.3 22.1

13.3

21,0 7.3

22.1 0.4 0.9 0.7 5.1 2.4

12.0 na

21.3

2.57 na

Source: Company data, Deutsche Bank estimates

2017

4.86 4.94 2.90

25.48

2.2 10.3 10.1 2.3

10.8 5.8

2.5 5.6 7.3

40,030 18,306 13,931 12,816 8,762

13,884 -4,344 9,540

-2,083 -4,250 -2,777 1,919 2,358

182

10,550 62,093

1,037 22,046 95,726 14,395 30,216 44,611 51,115

3,845

18.5 71.6

58.7

45.7 34.8

20.5

7.5 19.7

34.8 0.4 0.9 0.7 9.5 2.2

20.9 73.1 23.7

4.94 92.5

2018

5.22 8.08 5.50

26.49

2.4 11.2 7.2 2.2

7.1 9.4

2.6 6.4 8.5

40,522 16,576 12,561 18,167 13,638

11,821 -4,844 6,977

-5,386 -5,356 -2,246 6,234

342 -172

10,773 56,361

912 22,903 90,949 10,518 30,608 41,126 49,823

-255

1.2 7.3

68.1

40.9 31.0

19.9

-0.5 41.5

31.0 0.4 1.0 1.1

14.6 2.1

30.9 47.9 26.2

8.08 63.5

2019E

4.97 4.97 2.98

25.07

2.8 13.7 13.7 2.7

6.0 4.4

3.0 7.1 9.4

39,559 16,887 12,679 12,051

8,118

12,428 -5,804 6,625

-1,700 -9,536

0 -900

-5,512 1

5,261 57,957

912 23,594 87,724 10,518 30,369 40,887 46,837

5,257

-2.4 -4.7

60.0

42.7 32.1

19.3

11.2 69.5

32.1 0.4 1.0 0.6 9.1 2.1

19.3 -37.5 25.8

4.97 -38.5

IZI 2020E

4.89 4.89 3.43

26.85

2.7 13.9 13.9 2.5

6.0 5.0

3.0 7.2 9.7

40,493 16,942 12,546 11,B43 7,920

12,965 -6,364 6,600

0 -5,045

-817 0

739 -1

6,000 59,925

912 23,759 90,596

9,701 31,022 40,723 49,873

3,701

2.4 -1.5

70.0

41.8 31.0

18.9

7.4 50.8

31.0 0.5 1,0 0,6 8.9 2.1

18.9 -2.2 26.0

4.89 -1.5

2021E

4.73 4.73 3.31

28.21

2.7 14.4 14.4 2.4

5.7 4.9

3.0 7.3 9.9

40,572 16,613 12,163 11,489 7,653

12,504 -6,202 6,302

0 -5,452

-776 0

75 0

6,075 61,677

912 23,806 92,470

8,925 31,288 40,213 52,257

2,851

0.2 -3.4

70.0

40.9 30.0

17.2

5.5 58.8

30.0 0.4 1.0 0,6 8.4 2.1

17.2 -8.9 27.5

4.73 -3.4


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Investment Thesis

Outlook

Rio Tinto has a high-quality suite of assets that is generally low operating cost, long life, expandable, and mostly located in low-risk countries, offering above-average returns and operating margins. Rio is pushing ahead with a clear strategy under its new CEO J-S Jacques to reduce costs (sustaining capex, operating costs, head office and exploration expenditure), keep the best growth at the lowest capital intensity, and pursue copper and bauxite growth, pay down debt (gearing is now at the bottom of the 20-30% target range), and pay out between 40-60% of earnings in dividends each year. Successful execution of the strategy has driven a re-rating relative to peers and we think the longer term risks to iron ore demand will limit the re-rating potential from here. We rate the stock a Hold, trading close to our NPV.

Valuation

We value Rio Tinto using discounted cash flow analysis of each of its assets and applying WACC of 9%. We set our target price in line with our DCF-derived net present valuation.

Risks

Key risks to our view include higher or lower iron ore, copper, coal and aluminium prices and movement in FX than what we currently forecast.


IZ]

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Rio Tinto

Appendix 1

Important Disclosures

*Other information available upon request

I Disclosure checklist Company

Rio Tinto

Ticker

RIO.AX

Recent price* Disclosure

95.12 (AUD) 27 Feb 2019 7

IZI

*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors • Other information is sourced from Deutsche Bank, subject companies, and other sources . For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at httras.J/rn1a991qh db oorT)/ 8oscar9h/Oi1;clo:nHor.1Comp.nrwSoarqh. Aside from within this report, important risk and conflict disclosures can also be found at hlll);t:/lrut,or,rah db,conYRosenrqh/Tgp CIIE·m1iti®7 !!Jiql91d~RB0002 Investors are strongly encouraged to review this information before invest ing.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

Important Disclosures Required by Non-U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. James Gurry


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I Historical recommendations and target price. Rio Tinto (RIO.AX) (as of0l/31/2019)

100.00

75 .00

QI t..) ·;: C.

? 50.00 ::s t..) QI

U)

25.00

0.00 May '17 Sep'17 Jan '18 May'18

Date

1. 03/07/2017 Buy, Target Price Change AUD 72.00 Paul-D Young••

2. 06/22/2017 Buy, Target Price Change AUD 73.00 Paul-D Young ..


4 . 10/06/2017 Buy, Target Price Change AUD 77.00 Paul-D Young ..


6. 12/04/2017 Buy, Target Price Change AUD 79.00 Paul-D Young••


8. 02/08/2018 Buy, Target Price Change AUD 84 .00 Paul-D Young ..

I Equity Rating l<ey

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold : We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.


9.

10.

11.

12.

13.

14.

15.

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

•• Analyst is no longer at Deutsche Bank

Sep'18 Jan '19

04/11/2018 Buy, Target Price Change AUD 86.00 Paul-D Young ..

04/18/2018 Buy, Target Price Change AUD 89.00 Matthew Greene ..

06/11/2018 Downgraded to Hold, Target Price Change AUD 89 .00 Liam Fitzpatrick

09/10/2018 Hold, Target Price Change AUD 78 .00 James Gurry

10/02/2018 Hold, Target Price Change AUD 84.00 James Gurry

01/08/2019 Hold, Target Price Change AUD B0.00 James Gurry

01/31/2019 Hold, Target Price Change AUD 82.50 James Gurry

Equity rating dispersion and banking relationships

100

■ Cos, w/ Banking Rela1lonshlp ■ companies covered

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