Business Overview
Rio Tinto Plc (LON: RIO) is a metal and mining company operating at a global scale with a focus to explore, mine and process the Earth's mineral resources. The company is headquartered in London, United Kingdom and is a globally renowned leader in aluminium. The group has a presence across 35 countries across six continents with significant business spread across Australia and North America. The company also has a 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.

Simon Thompson is the Chairman of the group; he 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.

Key Statistics



Top Shareholders

 

Recent News

On 4th December 2019, Rio Tinto announced that it  curtailed operations at South African based RBM (Richards Bay Minerals). The action was taken to ensure the safety of its employees from the violence in the communities living nearly the operations site. All the activities related to mining had been stopped, smelters running at a minimum level with few employees. All the activities related to construction have been paused temporarily at Zulti South project. The company is also in discussion with the governments, the police and the local communities to address the security and the safety issues and to bring operations back to normal. The company expects production of Titanium dioxide slag to be on the lower side of the set guidance in between 1.2 million and 1.4 million tonnes.

On 3rd December 2019, Rio Tinto announced the sanction of an investment of $1.5 billion for production at the US-based Kennecott copper operation. The investment is aimed at the extension of operations to 2032 at Kennecott and is expected to deliver refined copper of up to 1 million tonnes between 2026 and 2032. The company will start additional investment in FY2020 and is also included in the capital expenditure guidance of the company. 

On 27th November 2019, Rio Tinto announced the authorisation of an investment of $749 million to sustain the production capacity of its Western Australia based Pilbara mine.

Operations Update Q3 FY2019

On 16th October 2019, Rio Tinto announced its operations update for the third quarter of the financial year 2019. The company’s iron ore shipments from Pilbara increased by 5 per cent to 86.1 million tonnes versus the Q3 FY2018 data. Driven by the operational recovery, the production of iron ore at Pilbara increased by 6 per cent to 87.3 million tonnes versus Q3 FY2018 data and an increase of 10 per cent versus Q2 FY2019 data. The bauxiteshipmentsand productionincreased by 23 per cent and 9 per cent, respectivelyfor the period. Due to the safety shutdownin Icelandoperations and pot reliningat Canadianoperations, resulted in a decline in Aluminium productionby 3 per cent to 0.8 million tonnesversus Q3 FY2018 data. Driven by an improved throughput at Escondidaand higher grades at Kennecott, the mined copper productionincreased by 15 per cent to 158 thousand tonnesversus Q2 FY2019 data, while the production declined by 1 per cent versus Q3 FY2018 data. With the restart of furnacesin FY2019 and improved operational performance, the productionof Titanium dioxide slagwas up by 8 per centversus Q3 FY2018 data. In Q3 FY2019, the production from Canadian operations was up by 3 per cent and 17 per cent versus Q3 FY2018 and Q2 FY2019 data, respectively. The company’s guidance remained unchanged except bauxite production, which is revised to 54 million tonnesfrom a range of 56million tonnes to 59 million tonnesand alumina productionhad been revised to 7.7 million tonnesfrom a range of 8.1 million tonnesto 8.4 million tonnes. A Memorandum of Understanding has been signed by the company with Tsinghua Universityand China Baowu Steel Group.It will help the company to develop and implementmethods to improve environmental performance and reduce carbon emissions.Due to an increased involvement in the advanced projects, the company spent $177 million on exploration and evaluation which was 62 per cent higher versus the Q3 FY2018 data.

Financial Highlights: H1 Financial Year 2019 (30^th June 2019, $, million)

 
(Source: Interim Report, Company Website)

In the first half of the financial year 2019, as higher iron ore prices helped in offsetting the impact of lower volumes and lower aluminium prices, excluding the $0.8 billion contributions by the coking coal assets divested in 2018, consolidated sales revenue of $20.7 billion was 9 per cent 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 per cent. 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. Due to a strong contribution from Iron Ore, underlying earnings during the period was $4.9 billion, which was 12 per cent higher than the prior period. Basic earnings per share remained flat over the year at 252.5 cents, while the underlying earnings per share rose by 19 per cent to record 301.5 cents. 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.

Financial Ratios
 
 

The reported EBITDA margin of 47.70 per cent for the H1 FY2019 stood higher than the industry median of 32.1 per cent. The reported operating margin in H1 FY2019 declined by 6.5 per cent to 25.5 per cent from 32 per cent reported last year for the same period. The reported Pretax margin of 25 per cent for the H1 FY2019 stood higher than the industry median of 10.1 per cent. Net margin reported was 14.1 per cent for the H1 of the financial year 2019, reflecting a decline of 8.5 per cent when comparedwith last year data for the same period. Return on equity for the H1 of the Financial year 2019 stood at 9.9 per cent, which remained higher than the industry median of 4.7 per cent. On the liquidity front, Rio Tinto Plc’s current ratio was lower than the industry median of 1.77, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Rio Tinto Plc’s was 0.36x, which was lower as compared to the industry median of 0.55x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance

Daily Chart as at December-11-19, before the market close (Source: Thomson Reuters)

On December 11, 2019, at the time of writing (before the market close, at 10:02 AM GMT), Rio Tinto Plc shares were trading at GBX 4,297.50, up by 0.96 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,979.14/GBX 3,383.48. Stock’s average traded volume for 5 days was 1,804,423.40; 30 days – 2,345,805.23 and 90 days – 2,536,103.19. The average traded volume for 5 days was down by 23.08 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.43, reflecting higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £72.23 billion, with a dividend yield of 5.47 per cent.

Valuation Methodology
Method 1: EV/EBITDA Multiple Approach (NTM)

 


To compare Rio Tinto Plc with its peers, EV/EBITDA multiple has been used. The peers are Ferrexpo Plc (NTM EV/EBITDA was 3.47), Petra Diamonds Ltd (NTM EV/EBITDA was 4.19), Anglo American Plc (NTM EV/EBITDA was 4.93), South32 Ltd (NTM EV/EBITDA was 5.25) and Anglo-American Platinum Ltd (NTM EV/EBITDA was 8.44). The Average of EV/EBITDA (NTM) of the company’s peers was 5.20x (approx.)

Method 2: Price to Earnings Approach (NTM)

 

To compare Rio Tinto Plc with its peers, Price/Earnings multiple has been used. The peers are Antofagasta Plc (NTM Price/Earnings was 20.50), Glencore Plc (NTM Price/Earnings was 11.56), Kaz Minerals Plc (NTM Price/Earnings was 6.73), Ferrexpo Plc (NTM Price/Earnings was 4.81) and United Company RUSAL Plc (NTM Price/Earnings was 4.18). The average of Price/Earnings (NTM) of the company’s peers was 9.55x (approx.)

Growth and Risk Assessments

The company has been carefully reviewing its costs and level of investments made to enhance financial and operational performance. The company has many value-accretive projects in the pipeline with low risk and higher production. The company using its cost synergies, has optimized its operational structure to achieve sustainable growth in the future. The company has taken a note of potential disruption in operations due to the technological advancement and has started its transition accordingly. 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 has 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.

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 operations of the group have enabled it to deliver sector-leading cash returns to shareholders, which is backed by its strong portfolio and balance sheet. 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.

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 the capital expenditure is expected to be approximately $6.0 billion in 2019 and around $6.5 billion in the next two years.

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.

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from USD34,829 million in FY15 to USD40,522 million in FY2018. Compounded annual growth rate (CAGR) stood at 5.18 per cent.

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 4,256.50 (as on 10^th December 2019) with high single-digit upside potential based on 5.20x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 9.55x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).  
 

*The “Buy” recommendation is valid for the current price as covered in the report (as on 11^th December 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.76027 GBP.

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