Investment Highlights
 

1. Rio Tinto Plc (LON: RIO) has a wide geographic reach and offers a variety of products including Iron Ore, Aluminium, Copper, Borates, Diamonds, Salt and Titanium.
 

2. Continuous expansion of portfolio to perform resiliently in future. During 2019, the group made several project investments, including Kennecott copper mine in Utah (USD 1.5 billion), Oyu Tolgoi copper and gold underground project (USD 1.3 billion), Greater Tom Price operations (USD 749 million), Zulti South project (USD 463 million), among others.

3. To reduce the carbon footprint, the group has installed a solar photovoltaic plant in its Koodaideri mine. It is one of the advanced innovations being undertaken lately.

4. Rio invented a new aluminium alloy with a stronger structure that could reduce fuel consumption with better safety and handling.

5. The group made a direct economic contribution of around USD 45.1 billion to the communities and countries in which it operates.

6. Delivered strong revenue growth with decent operational performance for the current period.

7. Robust balance sheet with decent cash flow generation capabilities to drive shareholder returns.

8. The group has shown the ability to make extended investment decisions and construct & operate large projects, which can generate higher cash flows at lower costs.

9. Capital expenditure in 2019 was USD 5.5 billion, and even in 2020, it is expected to be in between USD 5 to USD 6 billion, reflecting the company’s commitment to invest through the cycle.     

10. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Rio Tinto PLC: Delivered Strong Safety Performance with Strategic Investments in Growth Projects

Rio Tinto Plc (LON: RIO) is a FTSE 100 listed, metals and mining company operating at a global scale, which produces Iron Ore, Copper, Borates, Aluminium, Diamond, Salt and Titanium. The group has a presence in 36 countries with around 60 operations across six continents, with a significant business spread in Australia and North America. The company also has a substantial business in South America, Africa, Europe, and Asia.

Several industries, including the manufacturer of cars, smartphones, household, wind turbines and agriculture products, use the metals and minerals produced by Rio Tinto. 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 46,000 people around the world.

Key Statistics
 

Next Financial Calendar Events: On 7^th May 2020, the Rio Tinto Group is scheduled to organise the annual general meeting in Brisbane, while on 17^th July 2020, the group will release its second-quarter 2020 results.

Strategic Objectives and its Progress in terms of Key Performing Indicators (KPI)

People
 

1. The group is focusing on attracting, developing, and training the diverse talent across global operations.

2. KPI: All injury frequency rate stood at 0.42 per 200,000 hours worked in FY2019.
 

Performance

1. Maximizing the value from mine to market with low-carbon emission and safety concerns.

2. KPI: Net cash generated from operating activities was USD 14,912 million, while the total shareholder return stood at 49.6% in FY2019.
 

Portfolio and Partners
 

1. Building a strong portfolio with partnerships and collaborations with suppliers, government, industry leaders, technology partners, among others.

2. KPI: Return on capital employed was 24% in FY2019 while Underlying EBITDA was USD 21.2 billion.
 

Significant Developments of 2020
 

1. 8 April 2020: Rio Tinto PLC had announced a final dividend for the full-year 2019 to be paid as 177.47 pence per ordinary shares.

2. 24 March 2020:The group had ceased the production in Quebec operations and at Richards Bay Minerals, South Africa, following the government’s instructions to contain the spread of Covid-19.

3. 17 February 2020:The group had announced the share buy-back programme and purchased 51,083 ordinary shares at the average price of 4217.8473 pence per share.
 

Top Shareholders

 

Industry Overview

Mining is a highly capital intensive and competitive industry, which massively impacts the environment and society. Therefore, it is imperative to consider all the stakeholders for sustainable success in the long run. It requires consistent investments in right skills and capabilities, building relationship with technology partners, suppliers and other stakeholders in the supply chain, regular measures to protect the environment and society. As per market estimates, the market size of global mining equipment was valued at USD 144.37 billion in 2019 and is expected to yield a CAGR of 12.7% from 2020 to 2027.

In 2020, the economic turmoil has impacted the commodity supply, while restrictions pertinent to Covid-19 contagion has disrupted the supply chain globally. However, the group affirmed in their business updated that the demand has started to revamp from China, as demand for iron ore and bauxite increased in the first quarter. Regarding the safety parameter, the RIO group had zero fatalities in 2019.

Operations Update: Robust Production Performance in the First Quarter of Financial Year 2020
 

1. On 17^th April 2020, Rio Tinto released an update on the operational performance in the first quarter and the impact of Covid-19 on business performance. The group is focused on ensuring the health and safety of its employees.

2. Driven by strong network recovery in March, the Pilbara iron ore shipments increased by 5 per cent to 73 million tonnes, while the Bauxite production surged by 8 per cent to 13.8 million tonnes for the period, driven by successful ramp-up activities of Amrun in FY2019.

3. The production of Aluminium declined by 2 per cent to 0.8 million tonnes and Mined copper production declined by 8 per cent to 133 thousand tonnes in the Q1 FY2020.

4. Due to restrictions in South Africa and Quebec to contain the spread of the virus, the production of Titanium dioxide slag declined by 1 per cent to 293 thousand tonnes in Q1 FY2020, while pellets and concentrate production at IOC (Iron Ore Company of Canada) increased by 3 per cent for the period.

5. In the Q1 FY2020, the group’s major projects showed decent progress and are not affected by the outbreak of Covid-19 due to lockdown imposed by the government.

The group expect its capital expenditure to be between USD 5 billion to 6 billion in FY2020, due to favourable currency impact and Covid-19 constraints.
 

Financial Highlights: Strong Revenue and Underlying EBITDA Reported for the Year Ended 31st December 2019


(Source: Company Website)
 

1. The company has marketed that 2019 was another year of robust financial performance, with a strong balance sheet and continuing investment in high-value growth projects. The revenues surged by 7% to $43.2 billion in FY19, mainly driven by higher iron ore prices. 

2. The underlying EBITDA of $21.2 billion rose by 17% as compared with 2018, and the underlying EBITDA margin stood at 47%. ROCE (Return on capital employed) surged by five percentage points to 24% in 2019. 

3. The Board has proposed a final ordinary dividend per share of 231 US cents, taking total dividends declared to shareholders released this year to $7.2 billion. 

4. Net debt surged by $3.9 billion to net debt of $3.7 billion.

 
Financial Ratios – Strong Profitability Margins versus the Industry Median

 

The reported Gross margin, EBITDA margin, Operating Margin, Pretax margin and Net margin stood at 54.8 per cent, 48.9 per cent, 26.6 per cent, 25.8 per cent and 16.2 per cent, respectively, for the FY2019 period. All the mentioned metrics surged against the industry median. On the liquidity front, Rio Tinto Plc’s current ratio was lower than the industry median of 1.66, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Rio Tinto Plc’s was 0.35x, which was lower as compared to the industry median of 0.40x.

Share Price Performance


Daily Chart as on 22^nd April 2020, before the market close (Source: Thomson Reuters)

On April 22, 2020, at the time of writing (before the market close, at 10:01 AM GMT), Rio Tinto Plc shares were trading at GBX 3,742.00, up by 2.99 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 4,979.14/GBX 2,954.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Rio Tinto Plc with its peers, Price/Earnings multiple has been used. The peers are Glencore Plc (NTM Price/Earnings was 15.24), South32 Ltd (NTM Price/Earnings was 13.37), BHP Group Plc (NTM Price/Earnings was 9.27), British American Tobacco Plc (NTM Price/Earnings was 8.27) and Kaz Minerals Plc (NTM Price/Earnings was 6.25). The Average of Price/Earnings (NTM) of the company’s peers was 10.50x (approx.)

Method 2: Price/Cash Flow (NTM) Approach
 
 


To compare Rio Tinto Plc with its peers, Price/Cash Flow multiple has been used. The peers are BAE Systems Plc (NTM Price/Cash Flow was 12.86), Fresnillo Plc (NTM Price/Cash Flow was 10.09), BHP Group Plc (NTM Price/Cash Flow was 5.43), Anglo American Plc (NTM Price/Cash Flow was 3.37) and Petra Diamonds Ltd (NTM Price/Cash Flow was 0.28). The Average of Price/Cash Flow (NTM) of the company’s peers was 6.40x (approx.)

Valuation Metrics


(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Rio Tinto Plc Vs FTSE 100 Index (5 Years)


(Source: Thomson Reuters)

In the last five years, Rio Tinto Plc share price has delivered 32.06 per cent returns as compared to negative 18.58 per cent returns of FTSE-100 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Thomson Reuters)

Rio Tinto Plc has generated a total return of 84.26 per cent in the last five years versus the total return of FTSE All share of negative 1.49 per cent for five years period.

Growth Prospects and Risk Assessment

The company has many value-accretive projects in the pipeline with low risk and higher production capabilities. The company is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies, had optimized its operational structure to achieve sustainable growth in the future. The company operates inmultiple geographies, and its profits can be impacted negatively due to foreign exchange rate fluctuations. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets.

Business Outlook Scenario

The company has shown an increase in financial performance in the financial year 2019. Both the top-line and the bottom-line performance has improved, with improved profitability margins for the period. The group has a strong pipeline of opportunity from its producing assets and is making an investment in those assets to fetch higher returns in the long-term. The company’s asset base is capable of generating decent cash flows, helping the company to increase its production in the long term.

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.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. The group remained confident about its management team and business model to face the uncertainty created due to Covid-19 outbreak.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 33,781 million in FY16 to USD 43,165 million in FY19. Compounded annual growth rate (CAGR) stood at 8.51 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 3,624.00 (as on 22^nd April 2020), with lower-double digit upside potential based on 10.50x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 6.40x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

*Currency exchange rate taken for 1 USD = 0.81181 GBP.

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