Rio Tinto's rising costs represent further challenges in RBC's eyes

RBC said that as input costs remained elevated, with some smelters being affected more than others, the cost of raw materials in Rio's aluminium division had continued to erode EBITDA margins across the group, with the total incremental bill for the year estimated to be roughly $500m.

The Canadian broker stated that once the sale of Rio's Dunkerque smelter is completed and, assuming the re-initiated sale of its Icelandic smelter is successful, close to 960 kilotons of alumina will be released. RBC expects the excess alumina will be sold to the market when the volatile alumina/aluminium market has consolidated, helping offset some of the costs associated with its legacy contracts in the Pacific.

However, with access to cheap power becoming a key competitive advantage in the smelting business, RBC said it still saw Rio Tinto as being "well positioned to benefit in the medium term", highlighting the miner's Canadian operations as a "sustainable competitive advantage" due to their hydropower capacity and Elysis JV technology.

RBC marked-to-market for the third quarter, increasing the cost of the legacy alumina contracts for the second half of the year by $100m, and incorporate the $3.2bn buyback announced.

"We maintain our 'underperform' rating as Rio Tinto trades at 7.8x 2019E EV/EBITDA, a premium to peers at 5.3x."

The broker also reiterated its 3,200p price target on Rio Tinto.