Business Profile
Rio Tinto Plc (RIO) is a leading mining and metal company listed on the London Stock Exchange. Its area of operations categorised into three segments: finding, mining, and processing mineral resources. As per the company website, Rio employs around 47,000 workforces and operating in 35 countries across six continents. Rio Tinto is a globally renowned leader in Aluminium, one of the world's most omnipresent metals. From the last 110 years, the company is engaged in the Aluminium business. The Company is based out in London, the United Kingdom.

Key Statistics

 

Recent Developments
On 27^th February 2019, Company announced its full-year 2018 earnings report. On 27^th February 2019, Rio declared a special dividend of GBP 1.8355 per share, going ex on 07-March-2019 and will be paid on 18^th-April-2019. On 21^st December 2018, Company announced sale of its entire stake in the Grasberg mine in Indonesia for 3.5 billion US Dollars. On 14^th December 2018, Company reported disposal of its aluminium smelter located at Dunkerque, France to Liberty House for USD$500 million.  On 13^th December 2019, Company announced a final cash dividend of GBP 1.359, will be paid on 18-Apr-2019. On 29^th November 2018, the group has agreed to USD$2.6 billion investment in Koodaideri Iron ore mine located in Western Australia. On 28^th November 2018, Company announced the appointment of Simon McKeon AO as an independent non-executive director of Rio Tinto Plc.

Key Management People


Top Shareholders


Q4 FY18 Production Update
Aluminium production was 3% lower in FY18 on account of an ongoing labour disruption at the Becancour smelter in Canada.Mined Copper production was 33% higher than FY17, primarily on account of a strong performance at Escondida.Titanium dioxide production plunged 15% in 2018 due to production disruption at Rio Tinto Fer et Titane in the second quarter and labour disputes between the contractor and their employees at Richard Bay Minerals in the first half. 

Financial Performance – FY18
During FY18 company reported consolidated revenue of $40.5 billion, which was $0.5 billion above than FY17.  Volume growth in Iron ore and copper and increase in the prices of aluminium and copper, squared-off the affect iron ore price and coal divestment. Underlying EBITDA during FY18 stood at $18.10 billion and this was comparatively 2% lower than 2017 EBITDA, on account of rise in energy cost and raw material costs. During FY18, Rio benefited from higher premium realised form aluminium and copper prices, copper and aluminium were up by 6% and 7% respectively in 2018. On 1^st of March 2018, the United States announced a tariff of 10% on US imports of aluminium from Canada, which was implemented from 1^st June 2017, the company did not expect this, because it has a significant impact on the financials of the business. Higher crude oil price in 2018 compared with 2017, slashed 's EBITDA by $436 million.  Mainly because of crude oil price was up by 31% in 2018 on an average basis to $71 per barrel. Rio's Pacific Aluminium smelters were also impacted by spurt in coal price. Tax rate during the year stood at 29%, 100bps higher against the FY17 tax rate. Net earnings for FY18 stood at $13.6bn, increased by 56% compared with FY17 data, including a gain of $4.6bn on disposals of businesses. Depreciation and amortisation expense of Rio Tinto was $391 million lower against previous year FY17. Company's interest and finance costs reduced by $385 million in FY18 compared with the last financial year, on account of lower net debt and lower early redemption costs from bond purchase and an increase in capitalised interest. The Australian dollar remained weaker throughout in 2018 as compared with 2017 against US dollar, on an average the US dollar surged by 3% against the AU dollar, remained unchanged against the Canadian dollar and declined by 1% against the South Africa rand. The volatility in the currency improved underlying EBITDA by $286 million compared with 2017. During FY18, Rio spent $43 million extra on exploration and evaluation against FY17, this was Rio’s highest value projects, primarily on account of resolution of copper projects in Arizona. Cash flow generated from operation stood at $11.8 billion, declined by 15% against the FY17, particularly led by higher tax payments in connection to their FY17 profit and unfavourable movement in the working capital. Capital expenditure for FY18 stood at $5.4 billion, surged by 21% compared with FTY17 as its crucial projects ramped up, including Amrun bauxite project in Queensland, You Tolgoi underground copper mine in Mongolia and completed implementation of Auto Haul, automation of their Pilbara train system. In FY18, the company generated free cash flow of $7.0bn, down by 27% against FY17, was in line with narrowed operating cash flow and increased capital expenditure. During FY18, the company paid around $5.4bn in dividends to its shareholders and did a buyback of its shares that cost the company around $5.4bn.

Stock Price Commentary – 1Year
 
Daily Chart as at Mar-07-19, before the market close (Source: Thomson Reuters)
 
Commentary
At the time of writing (as on 07 Mar'19) before the market close, shares of Rio Tinto Plc were quoting at GBX 4,153.30, representing a fall by 141.95 points or 3.3% against its previous day close. During the last one-year shares have registered a 52w high of GBX 4,541.0 and a 52w low of GBX 3,460 and at current market price stock was trading 8.5 per cent lower against its 52w high and 20 per cent above its 52w low. Rio' outstanding market capitalisation of GBP 75.8bn ranks it among the large-cap stocks trading on the London Stock Exchange. Stock's Beta of 1.38 makes it relatively highly volatile against the benchmark index. Rio's dividend yield stood at 6.07%, which was higher against its peers operating within the same line of business. In last one-year stock is up by 19.4% and on three months basis stock price surged by 27% (as at Mar-07-19) which indicates the stock is in an uptrend since last few months. At a simple moving average standpoint, shares were trading higher against its 30day, 60day and 200day simple moving averages by 4.45%, 10.92% and 13.77% respectively. 5day average daily volume of 3.4 million was 9.6% below the 30day average daily volume of 3.7 million.

Financial Ratios and Valuation Methodology

Ratio Commentary

Rio Tinto's gross margin for FY18 stood at 62.6% significantly above its peers median of 32.9% and since last five years, Rio's reported gross margin stood above 50%, which indicates its production team efficiency compared with its competition. Also, at EBITDA margin front, the company has been able to maintain its EBITDA margin above 40% since last three year and above 30% since the last 5 years which indicates management efficiency compared with its peers. During FY18 EBITDA margin of the company stood at 42.8% relatively very high compared with the industry median of 20.4% in FY18. Higher EBITDA margin indicates the cost controlling efficiency of the management. Operating margin for the financial year 2018 stood at 43.4% which again considerably higher against its industry median of 12.6%. At return on equity (ROE) standpoint, the performance of Rio is magnificent compared with the industry peers. For the year ended 31^st December 2018, ROE stood at 30.9%, improved 900bps against its previous year and performance was relatively very high compared with industry median during FY17, this was primarily driven by increased in commodity prices, realised gain out of divested business and forex gains. At liquidity standpoint primarily in terms of current ratio, Rio's performance had improved against FY17. The current ratio for FY18 stood at 1.91, which is more or less in line with the industry median. From a financial leverage point of view, Rio's performance has been improved compared with the FY17 and relatively less leveraged compared with its peers, in terms of debt/equity ratio.

Valuation Methodology

Valuation Method 1

 
Valuation Method 2 (Cash Flow Per Share (FY19E) approximately)


While valuing Rio Tinto Plc on Price-to-cash flow method, we have considered NTM P/Cash Flow of its peers, which were BHP Group PLC, Anglo American PLC, Glencore PLC, South32 Ltd, Antofagasta PLC, Vale SA and Kaz Minerals PLC and their P/CF (x) were 7x, 4.3x, 5.4x, 5.8x, 5.0x, 5.30x and 5.40x respectively.

Note: All forecasted figures and peers have been taken from Thomson Reuters.
 
Growth Prospects
For the next couple of years, we estimate global growth likely to weaken, unless US monetary policy normalises, and on-going trade tension put on rest. A surge in commodity prices in FY19 will have a favourable impact on the financials of Rio. Although, Rio has significant market share and any favourable development in the sector will drive growth in Rio as well.

Conclusion

Based on stellar margins, primarily EBITDA and Operating margin and higher return on equity (ROE) delivered by the Rio in FY18, and increasing commodities prices in the international market accompanied by ramped up of its crucial projects, we have given a BUY recommendation at the closing price of GBX 4,294, as at Mar-06-19 with single-digit upside potential based on 5.0x NTM Industry Median EV/EBITDA  on FY19E EBITDA and based on 5.4x NTM Peers Average Price-to-cash flow on FY19E Cash Flow Per Share).

*The buy recommendation is valid for the current price as covered in the report as on (7th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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