Deutsche Bank analysts expressed confidence over Rio Tinto (LON:RIO) following a positive visit to the mining giant’s key Pilbara iron ore operation in Australia.
The analyst team, led by Rob Clifford, note Rio management’s upbeat projection for expansion of the facility, with the company targeting an increase in production from 225 to 333 million tonnes per annum (Mtpa). The expansion could come in six months ahead of schedule in time for the first half of 2015 and remains on budget.
The company also indicated to Deutsche that the expansion may be upscaled to 351Mtpa. Additionally, work has commenced on further expansion to 433Mtpa and beyond.
The analysts are encouraged by indications from Rio that costs are being contained but note that no capex update was provided on the US$14.8 billionn Pilbara expansion and US$10 billion Simandou iron ore project in Guinea. Across the group, Rio has identified expansion of up to 650Mtpa in iron ore production.
Currently around 60% of the capex for the Phase 1 expansion at Pilbara to 283Mtpa is approved but only around 2-5% for the Phase 2 expansion to 333Mtpa.
For Simandou Rio intends to provide an updated capex estimate in the second half of 2011 after engineering has progressed further.
As for the overall demand outlook for iron ore, Rio is expecting global seaborne demand to increase by 85-90Mtpa over the next 10 years, mostly from increased steel production.
Deutsche is recommending Rio as ‘buy’ with a price target of 5,120p. Midafternoon Rio shares were down 55.5p to 4143.75p.