Rio Tinto PLC (LON: RIO) – Significant momentum gained from strong Iron-ore prices.

Rio Tinto PLC (LON: RIO) is a metal and mining company that produces iron ore, aluminium, copper, diamonds, and other minerals. The Company has its footprints in over 36 countries around the globe. Moreover, the four broader sets of product group encapsulate Aluminium, Copper & Diamonds, Energy & Minerals, and Iron Ore. RIO has an integrated network of 16 iron ore mines in the Pilbara, Western Australia.

(Source: Company presentation)

Furthermore, RIO is a global leader in aluminium, having high-quality bauxite mines and alumina refineries. The Energy & Minerals (E&M) portfolio consist of titanium dioxide, rutile & zircon, borates, iron ore concentrate & pellets, and uranium. RIO is the only mining company that does not produce fossil fuels. The Company is listed on FTSE 100 index.

On 20 April 2021, RIO will release the Q1 FY21 operational review.

Recent Trend of Dividend Payments

(Source: Company result)

Rio Tinto has adopted a progressive dividend policy with consistent dividend payments at the end of each financial period. Moreover, the Company will pay the final dividend of 309 cents per share and a special dividend of 93 cents per share on 15 April 2021. The ex-dividend date was 4 March 2021. The total FY20 dividend remained at 557 cents per share, representing around 72% of FY20 underlying earnings. It represented 70% of underlying earnings during FY19.

Growth Prospects and Risk Assessment

RIO has delivered robust growth during FY20 despite the Covid-19 pandemic, 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. Moreover, RIO has declared growth in FY20 full-year dividend, illustrating increasing confidence in the growth prospects. The main driver for RIO and the mining industry would be China. The Chinese economy has shown resilient performance driven by the approved stimulus, and it had boosted the commodity prices as well. Overall, the Company is well-positioned, reflected by the robust balance sheet with net debt of less than USD 1.0 billion.

(Source: Company presentation)

Overall, Chinese infrastructure investments had resulted in record imports for Iron-ore, and RIO had incurred a significant expenditure of around USD 625 million in the exploration and evaluation activities during FY20.

However, there are certain potential risks that can impact the business, such as financial risk, sustainable risk, legal & regulatory environment, climate change, foreign exchange rate fluctuations, global political uncertainty regarding trade policy, etc. Moreover, 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.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global mining equipment industry was USD 144.37 billion during 2019. Furthermore, the industry is expected to grow at a CAGR of 12.7% from 2020 to 2027. Moreover, the mining industry would be boosted by an ongoing digital mine innovation well supported by the rising investment and government support.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Rio Tinto Plc.

Recent Developments

On 3 March 2021: The Company stated that Simon Thompson, as a Chairman of Rio Tinto, will not seek re-election as a non-executive director at the 2022 annual general meeting. Simon McKeon, as a senior independent director of Rio Tinto Limited, and Sam Laidlaw, senior independent director of Rio Tinto plc, will jointly lead the search for Simon Thompson's successor as Chair.

A Glimpse of Business Segments (FY20)

Key Performance Indicators

(Source: Company Website)

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 17 February 2021)

(Source: Company Website)

• In FY20, the Company delivered a strong safety performance and a good response to the COVID-19 pandemic, supported by a decent rally in the commodity prices.
• Net cash generated from operating activities was 6% higher than 2019. This was mainly due to higher iron ore prices, partially offset by an increase in working capital and higher taxes paid.
• The underlying EBITDA was 13% higher than 2019, with an underlying EBITDA margin of 51%. The increase was driven by the lower energy costs and higher copper and iron ore prices.
• ROCE (Return on capital employed) surged by 3% YoY, reflecting the increase in underlying earnings driven by higher iron ore prices, partially offset by an increase in capital employed due to capital expenditure and exchange rate movements.
• Free cash flow rose by USD 0.2 billion to USD 9.4 billion as compared with the previous year, mainly driven by the increase in net cash generated from operating activities.
• The Company witnessed a strong balance sheet, with net debt declined by USD 3 billion to USD 0.7 billion in FY20 against the previous year (FY19: USD 3.7 billion).
• The Company declared a full year ordinary dividend per share of 464 US cents and special dividend per share of 93 US cents, which brings the total dividend per share to 557 US cents. Therefore, it saw a stable five-year record of shareholder returns.
• In February 2021, the Board was updated on plans to publish the Group’s 2020 carbon targets, climate strategy and proposed programme of engagement to accompany the publication of the company’s second climate change report, following the methodology of the TCFD (Task Force on Climate-related Financial Disclosures).
• The Board considered changes in Australia’s energy policies and the potential impacts to the Australian smelters.
• Overall, Rio Tinto has shown great resilience, with a strong focus on capital discipline and value over volume approach.
• RIO has increased focus on project development, strengthening ESG credentials and operational excellence.
• The Company expects capital expenditure for FY2021, FY2022 and FY2023 to be around $7.5 billion.
• The main focus is to enhance the asset base through completion of the original planned sustaining investment.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 17 March 2021, at the time of writing (before the market close, at 9:40 AM GMT), Rio Tinto PLC shares were trading at GBX 5,530.00, down by 1.42% against the previous day closing price. Stock 52-week High was GBX 6,484.98, and Low was GBX 2,923.34, respectively.

From a technical standpoint, 200-day SMA (GBX 5,057.54), 200-day EMA (GBX 5,167.88), and 14-day RSI (33.57) support an upside potential.

In the last two years, Rio Tinto PLC’s stock price has delivered a return of ~60.69% as compared to ~0.49% return of FTSE 100 index and a ~25.56% return of FTSE All-Share Industrial Metals index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

Rio Tinto has shown remarkable resilience during FY20, with a strong focus on capital discipline and value over volume approach. Moreover, the Company had delivered strong ROCE (Return on Capital Employed) and robust adjusted EBITDA well supported by strong commodity prices during FY20. RIO has increased focus on project development, enhancing ESG credentials and achieving operational excellence. The Company expects capital expenditure to remain around USD 7.5 billion for each of FY21, FY22, and FY23. Rio Tinto maintained its five-year pay-out track record and has approved a total dividend of 557 cents per share during FY20, illustrating decent growth from the FY19 levels.

Furthermore, the focus is to enhance the asset base by completing the original planned sustaining investment. Overall, the Company would aim to generate lucrative returns for its shareholders from a short-, medium-, and long-term perspective driven by robust balance sheet and rising investments towards portfolio growth.

(Source: Company presentation)

Considering a robust demand and supply lag in iron ore, strong H2 recovery in copper and aluminium, solid financial results, robust cash flow, decent FY21 production guidance, operational conditions improving towards normal levels, robust financial & liquidity position, higher profitability margins, lower leverage ratios, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Rio Tinto at the current price of GBX 5,530.00 (as on 17 March 2021, before the market close at 9:40 AM GMT), with lower-double digit upside potential based on 7.09x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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