Rio Tinto PLC (LON: RIO): 7% improvement in Pilbara iron ore shipments during Q1 FY21

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. 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. Furthermore, RIO is a global leader in aluminium, having high-quality bauxite mines and alumina refineries.

On 16 July 2021, RIO will release the Q2 FY21 operations review.

(Source: Company presentation)

Recent trend of dividend payments

The Company had paid the final dividend of 309 US cents per share and a special dividend of 93 US cents per share on 15 April 2021. The ex-dividend date was 4 March 2021. The total FY20 dividend remained at 557 US cents per share, representing around 72% of FY20 underlying earnings, while it represented 70% of underlying earnings during FY19. 

Growth Prospects and Risk Assessment

• Robust Exploration Pipeline – The Company had a robust portfolio of early exploration projects in around 18 countries across eight commodities. Moreover, most of the exploration expenditure was focused on copper in several countries and diamond projects in Canada.
• Global Economic Growth – RIO had anticipated robust global economic growth in the near term driven by the accelerated progress of Covid-19 vaccine deployment and strong fiscal spending & monetary policy.
• Strong Rally in Copper price - The copper prices had shown around 50% jump during Q1 FY21 as compared to the similar period of the prior year benefitted by strong demand in China and significant recovery in other International markets.
• Robust Demand for steel in China – The industrial economy of China had experienced a positive momentum driven by the last year’s stimulus program. Moreover, the steel demand and construction activity during Q1 FY21 had exceeded the levels of 2019 and 2020. Thus, the steel prices in China had reached a decade-high at the end of Q1 FY21.
• Decarbonisation initiatives – The Company had recently joined Japan's Green Value Chain Platform Network to enhance decarbonisation efforts in the country. Moreover, RIO had collaborated with the energy technology company, Heliogen to track the progress of solar technology at the borates mine in California. 

The dividend yield of RIO remained significantly higher than the corresponding multiple of the Industrial Metals and Mining sector, illustrating the Company’s capability to generate higher returns for shareholders as compared to the industry. Moreover, the net debt to equity remained lower when compared to the Industrial Metals and Mining sector.

 Key Risks

• Transition to a low-carbon future – The emerging climate regulations may increase the cost and change the supply & demand dynamics for RIO’s products.
• Acquisitions & Divestments – RIO may get failed in realising anticipated value from acquisitions & divestments due to incorrect assumptions or higher integration costs.
• Disruption in Strategic partnerships – The disruption in partnerships may cause a reduction in the expected benefits and adversely impact the exploration & development activities.
• Commodity Economics – 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. 

Now, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of Rio Tinto PLC.

Aluminum Corp of China Ltd is the most significant shareholder as it holds nearly 182.55 million shares as of 31 March 2021.

Q1 FY21 Production Highlights (for the three months ended 31 March 2021, as of 20 April 2021)

(Source: Company result)

• The Company had delivered a 7% growth in Pilbara iron ore shipments to 77.8 million tonnes during Q1 FY21 as compared to Q1 FY20. However, the production remained 2% lower due to above-average wet weather in the mines.
• Moreover, the Bauxite production grew by around 2% to 13.6 million tonnes during Q1 FY21 as compared to Q4 FY20.
• RIO had shown around a 3% jump in aluminium production to 0.8 million tonnes during Q1 FY21 as Becancour smelter, Quebec operated at full capacity.
• Meanwhile, the Zulti South project remained on full suspension during the period. The site activity at the Kemano hydropower tunnel project was significantly reduced from December 2020 due to the adverse impact of the Covid-19 pandemic.
• RIO had shown a 5% reduction in titanium dioxide slag production during Q1 FY21.

Financial Ratios (FY20)

Share Price Performance Analysis

(Analysis done by Kalkine Group)

On 26 May 2021, at 10:16 AM GMT, RIO’s shares were trading at GBX 5,836.00, down by around 1.17% from the previous day closing price. Stock 52-week High and Low were GBX 6,788.00 and GBX 4,101.97, respectively.

On the weekly chart, the stock is trading above an upward sloping trend line for more than a year. Currently, prices are hovering around another upward sloping trend support level GBX 5,900, where 21-period SMA also rest, indicating the possibility of an upside reversal. The leading indicator RSI (14-period) is trading at ~38 levels and indicating a positive trend. The trend-following indicator 50-period SMA is trading below the current market price and supporting an upward stance.

In the last two years, RIO’s stock price had delivered a positive return of ~25.76%, while the FTSE All-Share Industrial Metals and Mining index (benchmark sector) had produced a return of about 15.69%, and FTSE 100 (benchmark index) had generated a return of around negative 3.11%. 

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

Business Outlook Scenario

RIO had achieved robust operational performance during the first quarter of 2021. Moreover, the Company had delivered strong ROCE and robust adjusted EBITDA well supported by high commodity prices during FY20. RIO had maintained guidance ranges for all the commodities. The Company had anticipated Pilbara iron ore shipments ranging from 325 million tonnes to 340 million tonnes for FY21. Furthermore, the bauxite production was expected to remain higher than FY20 levels and fall between 56 million tonnes to 59 million tonnes for FY21. The aluminium production would be expected to remain between 3.1 million tonnes and 3.3 million tonnes, while the alumina production would be ranging from 7.8 million tonnes to 8.2 million tonnes for FY21.

The Pilbara iron ore unit cost was expected to remain between USD 16.7 and USD 17.7 per tonne. The Company expects capital expenditure to remain around USD 7.5 billion for each of FY21, FY22, and FY23. RIO had shown accelerated progress in the Gudai-Darri project, with a production ramp expected for early 2022. Overall, the Company is well-positioned to deliver superior returns for shareholders by continued investment towards sustainability and growth of the portfolio.

Considering the robust exploration & development pipeline, consistent dividend payments, strong financial performance, good liquidity profile, bright outlook, robust profitability, 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 5,836.00 (as on 26 May 2021 at 10:16 AM GMT), with lower-double digit upside potential based on 7.77x 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 Peer information have been taken from REFINITIV.

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

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