Rio Tinto PLC (LON: RIO)

Rio Tinto PLC (LON: RIO) is an FTSE 100 index listed metal and mining company that produces iron ore, aluminium, copper, diamonds, gold, and other minerals. The Company has its footprints in over 36 countries around the globe. RIO has an integrated network of 16 iron ore mines in the Pilbara, Western Australia.

Recent trend of dividend payments

Rio Tinto has adopted a progressive dividend policy with consistent dividend payments at the end of each financial period. Moreover, the Company had paid a final dividend of 417 US cents per share and a special dividend of 62 US cents per share on 21 April 2022. The ex-dividend date was 10 March 2022. The total FY21 dividend remained at 1,040 US cents per share, representing around 79% of FY21 underlying earnings. Meanwhile, the full-year FY21 dividend grew year-on-year by around 87%.

(Source: LSE, chart created by Kalkine Group) 

Growth Prospects

• Acquisition Benefits: The Company had completed the acquisition of the Rincon lithium project in Argentina for USD 825 million during Q1 FY22. This acquisition deal will strengthen the battery materials business and enabled RIO to meet the double-digit growth in demand for lithium over the next decade.
• Exploration Projects: The Company had accelerated its progress on the Oyu Tolgoi underground copper/gold project in Mongolia. Moreover, sustainable production is expected to begin by H1 FY23, with the capital forecast at USD 6.925 billion.
• Strong Free Cash Flow: RIO had generated USD 25.3 billion of net cash from operating activities which led to an 88% higher free cash flow of USD 17.7 billion during FY21.

Key Risks 

• Federal Reserve Meeting: Federal Reserve Chairman, Jerome Powell, had hinted at an 0.5% increase in interest rates in the next Federal Reserve meeting due in early May 2022.
• Record UK Inflation: British inflation hit a 30-year high of around 7.0% in March 2022, intensifying the cost-of-living squeeze faced by households. Thus, it may result in a further interest rate hike by the Bank of England.
• Other Significant Risks: RIO’s business may get affected by volatility in the commodity prices and uncertainty in demand. There can be a danger to the health & safety of people considering the nature of operations.

Gold Industry Dynamics

• Growth Catalysts: The Russia-Ukraine war and rising inflation worldwide lent support to gold price over the near term.
• Key Events: The rising Treasury yields and strengthening of the US Dollar index firmed on prospects of aggressive interest rate hikes by the U.S. Federal Reserve may put pressure on yellow metal price. Furthermore, the Federal Reserve meeting lined up during May 2022 may further dent gold prices.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,917.90) is sustaining between the lower Bollinger band and the middle Bollinger band, indicating an upside direction for the commodity. At the same time, the 14-days RSI stood at ~44 levels.

Key Fundamental and Shareholders Statistics of Rio Tinto PLC. 

Aluminum Corp of China Ltd is the most significant shareholder as it holds nearly 182.55 million shares.

Q1 FY22 Production Highlights (for the three months period ended 31 March 2022, as on 20 April 2022)

(Source: Company Filings)

• Iron Ore Production: The iron-ore production from Pilbara operations remained around 71.7 million tonnes during Q1 FY22.
• Bauxite: The Bauxite production of 13.6 million tonnes remained in line with the first quarter of 2021.

Financial Highlights (for the 12 months period ended on 31 December 2021, as on 23 February 2022)

(Source: Company Filings)

• Strong Top-Line Business: The Company’s top-line revenue grew year-on-year by around 42% during FY21.
• Profitability: RIO’s net profit attributable to shareholders rose by around 116% to USD 21.09 billion during FY21.
• Balance Sheet: RIO had shown a positive turnaround from reporting a net debt of USD 0.70 billion at the start of FY21 to a net cash of USD 1.60 billion as of 31 December 2021.

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 25 April 2022 at 08:39 AM GMT+1, RIO’s shares were trading at GBX 5,317.00, down by around 6.13% from the previous day’s closing price. Stock’s 52-week High and Low were GBX 6,587.69 and GBX 4,319.87, respectively.

On a daily chart, the stock price is sustained around the lower Bollinger band. Hence, there could be an uptick in the stock price in the near term. Furthermore, the 14-days RSI of ~30.11 illustrates an oversold territory.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

 Business Outlook

RIO had delivered robust business performance during FY21, illustrating the strength of its asset quality. Moreover, RIO would make significant investments regarding Iron-ore in Pilbara projects. Furthermore, it would also invest in high-quality assets in Oyo Tolgoi and Winu to strengthen the production volume of Copper and Gold. Meanwhile, RIO had expected Pilbara iron ore 2022 unit cost ranging from USD 19.50 to USD 21.00 per tonne. In terms of the Capital Expenditure guidance, the Company expected it to be around USD 8.00 billion for FY22 and USD 9.00-USD 10.00 billion each in FY23 and FY24. In a nutshell, the Company aimed to generate increased returns for the shareholders with a significant pipeline of brownfield projects and favourable commodity prices.

(Source: Company Filings)

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the solid profitability growth, significant improvement in net cash position, consistent dividend payments, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Rio Tinto PLC at the current market price of GBX 5,317.00 (as of 25 April 2022 at 08:39 AM GMT+1), with lower-double digit upside potential based on 6.97x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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