Rio Tinto PLC

Rio Tinto PLC (LON: RIO) is a FTSE 100 index listed, Metals and Mining Company, which produces Iron Ore, Copper, Borates, Aluminum, Diamond, Salt and Titanium.

Rationale for Valuation – HOLD at GBX 5,443.00

• Solid Fundamentals: Despite the operational challenges, the Company maintained strong financial results with a significant spike in metal prices. Moreover, it has reduced its net debt with strong free cash flows and thus, recommended a special dividend of US$6.4 billion.
• Promising Outlook and Pipeline As demand for electric vehicles are soaring globally, demand for battery metal shall support the pricing environment. Moreover, RIO has various value-accretive projects in the pipeline with low risk and higher production capabilities.
• Technical Indicator: From a technical standpoint, the MACD line is still hovering above the signal line and trading above the centerline. It supports the bullish price pattern.
• Undervalued Multiples: On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, and Price/Cash Flow are quite undervalued against the Metals & Mining industry.

Key Risks

• Inflation Concern: British Consumer Price inflation surged to 5.4% in December 2021, putting pressure on the Bank of England to raise interest rates again.
• Commodity Price Volatility: The volatile demand and supply can affect commodity prices. Moreover, geopolitical issues can exacerbate the risk arising from exchange rate fluctuations.

Q4 FY21 Production Update (for the quarter ended 31 December 2021, as on 18 January 2022)

 (Source: Company Website)

• Strong Trading: Rio Tinto witnessed a solid demand for its products despite the challenging operating conditions. Therefore, the production for the commodities were slightly down compared to Q3 FY21.
• Projects Advancements: It progressed on several projects, including the Pilbara replacement mines. It also signed a number of partnerships to improve operational performance.
• Market Trend: The market dynamics were majorly encouraging throughout FY21 and therefore, the commodity prices were buoyant.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

RIO continued to deliver progress against its four pillars - generate attractive returns to shareholders, make a broader contribution to society, growing portfolio, and make Rio Tinto even stronger. For FY21, RIO has unveiled clear production guidance following the operational resilience shown in Q4 FY21. In a nutshell, RIO is in a great position to generate substantial value for its shareholders. The stock made a 52-week High and Low of GBX 6,788.00 and GBX 4,354.00, respectively.

Based on the strong underlying earnings, robust portfolio, favorable metal prices, and support from the valuation as done using the above method, we have given a “HOLD” recommendation on Rio Tinto PLC at the closing market price of GBX 5,443.00 (as on 18 January 2022).

EVRAZ PLC

Established in 1992, EVRAZ PLC is a FTSE 100 listed Industrial Metal Mining entity, involved in steel, mining, and vanadium business.   

On 14 January 2022, EVRAZ paid an interim dividend of US$0.20 per share to shareholders on the register on 24 December 2021.

Investment Rationale – BUY at GBX 557.20

• Demerger Update: The demerger of coal business shall improve capital allocation and sustainability objectives.
• Stable Fundamentals: During H1 FY21, the consolidated EBITDA jumped by 94% year-on-year in H1 FY21, while the EBITDA margin rose to 33.7%. The Group declared an interim dividend of US$0.55 per share (US$802.3 million in total), reflecting the Board's confidence in the Group's financial position and outlook.
• Promising Outlook: As the Omicron infections wave has now peaked in Britain, there is a likelihood of improvement in steel prices and higher demand.
• Undervalued Multiples: On a forward 12-month basis - EV/Sales, Price/Earnings, Price/Cash Flow, and EV/EBITDA multiples of the EVRAZ PLC are currently lower as compared to the median of the Metals & Mining industry.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~36.94) confirms the oversold position, while the price is hovering close to the lower Bollinger Band.

Risk Assessments

• High Leverage: The Company has an extensive debt profile with total debt of US$4,676 million by the end of H1 FY21, which can put the liquidity at risk if interest or covenant obligations are not timely met amidst challenging market trends.
• Operational Difficulty: Amidst the Covid-19 scenario, production stoppages and equipment failures can also impact the performance.

Q3 FY21 Trading Update (as on 28 October 2021)

 (Source: Company Website)

• Output: In Q3 FY21, EVRAZ’s crude steel output surged 1.0% quarter on quarter.
• Sales: The total sales of steel products fell by 8.2% quarter on quarter in Q3 FY21, due to market slowdown and logistic restrictions.
• Vanadium Products: Due to reduced demand from the automotive sector, the external sales of vanadium also reduced.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

EVRAZ’s potential demerger of PJSC Raspadskaya shall serve the long-term interests of our shareholders. Moreover, it continued to anticipate a dividend of minimum of US$300 million per annum. The Company has also reduced its net debt and seems stable to deliver an incremental shareholder value. The stock made a 52-week high and low of GBX 707.60 and GBX 480.17, respectively.

Based on the significant EBITDA improvement, drop in total debt, economic recovery, better demand outlook, supported by the valuation conducted above, we have given a “BUY” recommendation on EVRAZ PLC at the closing market price of GBX 557.20 (as on 18 January 2022), with lower double-digit upside potential based on 5.79x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

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

Note 2: Investment decision should be made depending on the investors’ appetite on 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 subject to the factors discussed above.

Note 3: 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 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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