Overview
Rio Tinto Plc (RIO) is a global metal and mining company that focuses on exploring, mining and processing the Earth's mineral resources. The company is headquartered in London, United Kingdom and is a globally renowned leader in aluminium. Although the company has a presence across 35 countries across six continents, it has significant business in Australia and North America. The company also has significant business in South America, Africa, Europe and Asia, and its major products are uranium, iron ore, industrial minerals (borates, titanium dioxide and salt), gold, diamond, copper, and aluminium. The company is listed on the London Stock Exchange and is a constituent of the FTSE 100 index.
The business of the company started when the “Rio Tinto Company” turned Rio Tinto (Red River) mines in Spain into the number one copper producer in the world from 1877 to 1891, after the mine was sold to a British-European syndicate led by a Scottish entrepreneur by the Spanish Government. After almost 150 years, it is counted amongst the largest producers of a range of essential materials, operating a diverse portfolio which employs 47,000 people around the world. Today, the company operates under a dual listed companies (DLC) structure, with the Rio Tinto Group consisting of Rio Tinto PLC and Rio Tinto Limited, which is headquartered in Melbourne, Australia. The Rio Tinto Limited shares are listed on the Australian Securities Exchange, and the American Depositary Receipts of the company are traded on the New York Stock Exchange. 

Key Statistics


Management

Simon Thompson is the Chairman of the group and was appointed in March 2018. Jean-Sébastien Jacques is the Chief Executive Officer. The CEO is supported by Jakob Stausholm, who is the Global Chief Financial Officer.

Segments

The company's operations are differentiated in four segments, namely Energy & Mineral, Copper & Diamonds, Aluminium and Iron Ore. Iron Ore operations comprise of an integrated network of 16 integrated mines in Western Australia, five iron ore products, four independent port terminals, a 1,700-kilometre rail network and related infrastructure, which complements each other to deliver high-quality iron ore to customers. The Aluminium operations manage the process from start to finish and comprise of an integrated portfolio of mines, refineries and smelters, making the company global leader in aluminium, with large-scale, high-quality bauxite mines and alumina refineries. The portfolio of Copper and Diamond Mines share expertise in underground mining, including a fully integrated global exploration, mining and sales and marketing business for diamonds, and operations in various stages in the mining lifecycle, from exploration to rehabilitation of copper. The Energy & Mineral division includes ten mining sites with operations in 6 countries to produce borates, iron ore concentrate and pellets, salt, titanium dioxide and uranium.

Top Shareholders


 (Source: Thomson Reuters)

Recent Development

The company on 1 August 2019 announced its exploration update for the Winu project, where it had discovered copper-gold mineralisation. Wide intersections of vein style copper mineralisation associated with gold and silver beneath relatively shallow cover was indicated by the new data provided on twenty-eight reverse circulation (RC) drill holes and fourteen diamond drill holes. The mining group reported that preliminary technical studies have commenced on the project, but sufficient understanding of the mineralised body is not available as the exploration project is still at an early stage.

Key Financial Highlights (H1 FY 2019, in $m)


(Source: Company Filings)

As higher iron ore prices helped in offsetting the impact of lower volumes and lower aluminium prices, excluding the $0.8 billion contribution by the coking coal assets divested in 2018, consolidated sales revenue of $20.7 billion was 9% higher than 2018 first half. The operating profit during the period was $5.2 billion, against $6.4 billion recorded in the prior year, reflecting the increase in impairment charges. Lower volumes and higher costs in iron ore was more than offset by an increase in iron ore prices, which drove underlying EBITDA to $10.3 billion, which was 19% higher than 2018 first half, and led to an EBITDA margin of 47%. Even as lower sales volumes declined underlying EBITDA by $232 million, commodity price movements increased underlying EBITDA by $1,878 million in 2019 first half. Profit before finance items and taxation amounted to $5.5 billion while profit before taxation was $5.2 billion. The company recorded a profit in 2019 first half of $2.9 billion (2018 first half: $4.5 billion) and net profit attributable to the owners totalled to $4.1 billion (2018 first half: $4.4 billion) in 2019 first half, mainly reflecting the impairment of Oyu Tolgoi. Due to a strong contribution from Iron Ore, underlying earnings during the period was $4.9 billion, which was 12% higher than the prior period. Basic earnings per share remained flat over the year at 252.5c, while the underlying earnings per share rose by 19% to record 301.5 cents. The company reported a 22% rise in net cash from operating activities to $6.4 billion, while it generated $3.9 billion of free cash flow in the first half of 2019, which was 35% higher against the corresponding period last year. The group declared ordinary dividend per share of 151 cents, which amounted to $2.5 billion, and announced a special dividend of 61 cents, which amounted to $1 billion. As a result of $1.0 billion of the ongoing share buy-back and the final and special dividends of $6.8 billion related to last year, net debt of $4.9 billion rose by $5.1 billion in the first half of 2019, while net gearing increased to 10% at 30 June 2019 (31 December 2018: -1%).

Financial Ratios


(Source: Thomson Reuters)

The company has consistently reported a higher profitability ratio, though the margins declined in the first half of 2019. While the liquidity ratios declined during the period, it was still above the industry median. As the company recorded higher debt during the first half, leverage ratio increased, but were still below the peers. The activity ratio was lower than the industry median, suggesting that the company still has a room for improvement.

Valuation Methodology
Method 1:Price/Earnings Multiple Approach (NTM)


To compare RIO with its peers, Price/Earnings multiple has been used. The peers are Kaz Minerals PLC(NTM Price/Earnings was 5.4), Vale SA(NTM Price/Earnings was 6.00), Anglo American PLC(NTM Price/Earnings was 7.62),Glencore PLC(NTM Price/Earnings was 9.12),BHP Group PLC(NTM Price/Earnings was 9.71) and South32 Ltd(NTM Price/Earnings was 10.61). The median of Price/Earnings (NTM) of the company’s peers was 8.37x (approx.).

Method 2: EV/EBITDAMultiple Approach (NTM)


To compare RIO with its peers, EV/EBITDA multiple has been used. The peers are Fortescue Metals Group Ltd(NTM EV/EBITDA was 2.61), Atalaya Mining PLC(NTM EV/EBITDA was 3.47), Acacia Mining PLC(NTM EV/EBITDA was 3.93),Vale SA(NTM EV/EBITDA was 23.96), and Kaz Minerals PLC (NTM EV/EBITDA was 4.00). The mean of EV/EBITDA (NTM) of the company’s peers was 3.59x (approx.).

Share Price Commentary


Daily Chart as at 07-August-19, before the market close (Source: Thomson Reuters)

On 07 August 2019, at the time of writing (before the market close, at 3:15 pm GMT), RIO shares were trading at GBX 4,194, down by 0.79 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 5,039.00/GBX 3,460.00. Stock’s average traded volume for 5 days was 4,926,632.60; 30 days – 3,022,039.97 and 90 days – 3,077,390.59. The average traded volume for 5 days was up by 63 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.42, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £71.88 billion, with a dividend yield of 5.51 per cent.

Risks Assessment and Growth Prospects
The prices of various commodities can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Also, since the company had operations in diverse regions, adverse exchange rate movements can impact the bottom-line numbers. Demand for products can also be impacted by the decelerating economic growth in China, which is a leading importer of many commodities, and its demand is a strong driver of price. In the short-term, the company expects to face challenges from macroeconomic and geopolitical uncertainties, not least from the continuing global trade tensions, which has impacted global growth. However, driven by increasing requirements for renewable energy, industrialisation and urbanisation, global demand for copper is set to grow, which augurs well for the company. Despite the threat from the US-China trade war, the Chinese economy has remained healthy, fuelled by an increased share of domestic consumption and supported by positive policy decisions and reforms. The company has taken note of potential disruption in operations due to technological advancement and has started its transition accordingly. Despite weather impacts, the company expects the run-rate to be around $0.5 billion from its mine-to-market programme in FY 2019, while capital expenditure is expected to be approximately $6.0 billion in 2019 and around $6.5 billion in the next two years. With an aim to strike a balance between cash returns to shareholders and sustainable investment in the business, the company expects the cash returns to shareholders to be in a range of 40-60% of underlying earnings over the long run, indicating the confidence of the board in the performance of the company.

Conclusion
The company is no longer under the threat of monetary policy normalisation and a successful resolution to US-China trade negotiations would provide a significant boost to the company. The successful operation of the group has enabled it to deliver sector-leading cash returns to shareholders, which is backed by its strong portfolio and balance sheet.

Based on the decent prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 4,227.50 (as on 06 August 2019) with low double-digit upside potential based on 8.37x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 3.59x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 07-August-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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