Rio Tinto PLC

Rio Tinto PLC (LON: RIO) is an FTSE 100 listed metals & mining company that produces iron ore, aluminium, copper, diamonds, and other minerals with footprints in over 36 countries around the globe.

On 14 October 2021, RIO will release the Q3 FY21 operational review.

RIO will pay a special interim dividend of 404.10 pence per share on 23 September 2021, while the ex-dividend date was 12 August 2021.

Investment Rationale for Valuation – BUY at GBX 4,805.00

• On the profitability front, RIO’s EBITDA margin and the net margin remained more than the respective industry median of 40.3% and 15.1% during H1 FY21.
• RIO had maintained a better leverage position and sound liquidity profile during H1 FY21 when compared with the industry median of the corresponding metrics.
• With regards to the shareholders, RIO had delivered a solid growth of around 262% in the interim dividend paid during H1 FY21.
• From a technical standpoint, RIO is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.
• The 14-days RSI of ~32.37 is approaching oversold territory.

Key Risks

• RIO may get failed in realising anticipated value from acquisitions & divestments due to incorrect assumptions or higher integration costs.
• Any significant fluctuation in commodity price and adverse exchange rate movements may reduce the cash flow.
• Moreover, inadequate knowledge of the resources may lead to an increase in production costs.
  

Recent Developments 

On 24 August 2021, RIO updated that it had restarted operations at Richards Bay Minerals (RBM) in South Africa stabilisation of the security situation around the mine. 

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021, as of 28 July 2021)

(Source: LSE Website)

• The consolidated sales revenue grew by 71% from USD 19.36 billion during H1 FY20 to USD 33.08 billion during H1 FY21.
• The higher metal price had boosted the profitability, and underlying EBITDA jumped by approximately 118% during H1 FY21.
• The underlying return on capital employed witnessed a significant rise from 21% during H1 FY20 to around 50% for H1 FY21.
• The free cash flow rose by around 262% during H1 FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had anticipated incurring capital expenditure of USD 7.50 billion per year for the next three years from 2021 to 2023. Moreover, RIO had managed to provide detailed guidance for each of the commodities along with the interim results announcement. The stock made a 52-week low and high of GBX 4,252.50 and GBX 6,788.00, respectively.

(Source: LSE Website)

Based on the stellar H1 FY21 results, improved guidance, and valuation as done using the above method, we have given a “BUY” recommendation on Rio Tinto PLC at the current market price of GBX 4,805.00 (as on 23 September 2021 at 08:48 AM GMT+1), with lower-double digit upside potential based on 5.56x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Fresnillo PLC

Fresnillo PLC (LON: FRES) is an FTSE-100 listed world’s leading silver producer and Mexico’s largest gold producer. The Company is engaged in mining and beneficiating non-ferrous minerals like silver, gold, lead and zinc.

On 27 October 2021, FRES will release the Q3 FY21 production report.

FRES had paid an interim dividend of 9.90 US cents per share on 15 September 2021, while the ex-dividend date was 12 August 2021.

Investment Rationale for Valuation – BUY at GBX 785.39

• The top-line revenue and bottom-line profitability witnessed a significant increasing trend during H1 FY21.
• The Q2 FY21 silver production demonstrated a 17.9% growth when compared with Q1 FY21 levels.
• The free cash flow rose from USD 265.70 million during H1 FY20 to USD 305.10 million during H1 FY21.
• From a technical standpoint, FRES is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.
• Moreover, 14 days RSI of ~35.53 is also supporting an upside momentum in the stock price.

Key Risks

• Any rise in interest rates would make it difficult for the FRES to raise debt funds for executing further projects.
• The implementation of the new law restricting the ability to subcontract labour in Mexico may adversely impact the operations.
  

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021, as of 03 August 2021)

(Source: LSE Website)

• The adjusted revenue had shown substantial growth of around 37.1% to USD 1.54 billion during H1 FY21 due to higher sales price and increased volumes.
• On the profitability front, the profit skyrocketed by around 445.8% during H1 FY21.
• With regards to the balance sheet, the Company had cash and other liquid funds of USD 1.20 billion as of 30 June 2021.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

FRES remained on track to meet FY21 silver production ranging from 53.5 moz to 59.5 moz and gold production to fall between 675 koz and 725 koz. Moreover, the Company had shown decent year-on-year growth in gold and silver production volumes during H1 FY21. Meanwhile, the commissioning of Juanicipio mine remained on track to begin by the end of the year The stock made a 52-week low and high of GBX 742.60 and GBX 1,369.11, respectively.

Based on the expected commissioning of Juanicipio mine, robust profitability, and valuation as done using the above method, we have given a “BUY” recommendation on Fresnillo PLC at the current market price of GBX 785.39 (as on 23 September 2021 at 08:18 AM GMT+1), with lower-double digit upside potential based on 17.46x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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