Rio Tinto PLC (LON: RIO) – Partnering to reduce the carbon footprint across its value chains.

Rio Tinto Plc is an FTSE 100 listed metals & mining company founded in 1873 and headquartered in London, United Kingdom. It produces iron ore, aluminium, copper, diamonds, and other minerals with footprints in many countries around the globe. Moreover, the four broader sets of product groups 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. The Company promotes itself as a producer of materials essential for a low-carbon future. RIO is also striving to reduce the carbon footprint in its operations.

On 28 July 2021, RIO would announce its H1 FY2021 results. In that, the Company would update its EBITDA sensitivities on prices of Copper, Aluminium, Gold, Pilbara iron ore, Brent crude, etc.

Recent trend of dividend payments

  (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by RIO from FY2017 to FY2020. The last dividend of FY2020, GBX 288.63 per share, was paid on 15 April 2021 (final-Special dividend). It had an ex-dividend date of 4 March 2021. The next dividend would be declared on 28 July 2021(interim dividend). It will have an ex-dividend date of 12 August 2021 and a payment date of 23 September 2021.

The dividend yield of RIO remained significantly higher than the corresponding dividend yield of the industrial metals and mining sector.

Growth Prospects

• Favourable commodity prices: There is a favourable pricing environment for the minerals RIO produces, which could drive its growth. Iron ore price more than doubled YoY, the aluminium price rose ~53% YoY, and copper price surged ~77% YoY.
• Strong demand from China and the US market recovery: Chinese economy recovered strongly following its lengthy slowdown by the Covid-19 impact. The Chinese government’s stimulus program led to positive momentum, and steel demand from China continues to recover, driven by construction and automotive sectors demand. Also, in the US, post the reduction of Covid-19 restrictions, consumer confidence is rising.
• Global economic growth: Driven by strong fiscal and monetary spending as well as vaccination drives, global consumption has recovered. The global demand is up ~15% YoY with robust consumption. Hence, it should drive the demand for the minerals RIO produces.
• Significant investments in projects: The Company is continuously making significant investments in development and growth projects. It plans to have a capital expenditure of ~USD 7.5 billion each year from 2021 to 2023.
• Sustainability initiatives: In Q2 FY2021, RIO entered into four partnerships to make further progress on its efforts to decarbonise its value chain. The Company is working on its ambitions to reach net-zero carbon emissions across its operations by 2050. The management would continue to follow its climate strategy in partnership with other businesses and stakeholders.

Key Risks 

• Disruptions in operations: Recently, the Company announced that due to the depletion of available feedstock, it would shut one of its four furnaces in its Richards Bay Minerals operation in South Africa. There could be similar events, which could lead to further disruptions and loss of production for the Company.
• Volatility in commodity prices: Commodity prices are volatile. Hence any significant reduction in commodity prices could lead to a substantial reduction in the top line and margin for the Company.
• Government regulations: There are continuously depleting mineral reserves throughout the world. Hence, government regulations regarding mining activity are stringent. It could hamper the market growth for the mining companies.
• Environmental impact: There is a significant environmental impact from mining activities. Hence, mining companies have to bear additional costs to reduce this impact.
• Adverse weather conditions: Adverse weather conditions could significantly affect the operations of mining companies. In Q2 FY2021, due to severe wet weather in Eastern Australia, RIO’s Bauxite production declined.
  

Now we will analyse some key fundamental and shareholders statistics of Rio Tinto PLC.

Recent Development 

Richard Bay Minerals shuts one of its furnaces: On 21 July 2021, the Company announced that due to the depletion of available feedstock, it would shut one of its four furnaces in its Richards Bay Minerals operation in South Africa.

Agreement to assess Panguna mine legacy impact: On 21 July 2021, the Company announced that it had reached an agreement with Bougainville community members to assess the legacy impacts of the former Panguna copper mine in Bougainville.

New Chief Legal Officer: On 7 July 2021, the Company appointed Isabelle Deschamps as Chief Legal Officer & External Affairs. She would join on 25 October 2021.

Q2 FY2021 Production Highlights (for the three months ended 30 June 2021 as of 16 July 2021)

(Source: LSE Website)

• Mainly due to above-average rainfall in the West Pilbara and shutdowns to enable replacement mines, Pilbara iron ore production in Q2 FY2021 was down 9% YoY.
• In Q1 FY2021, there was severe wet weather in Eastern Australia. It led to system instability, and Bauxite production declined 6% YoY in Q2 FY2021.
• Due to the prolonged impact of COVID-19, there were lower recoveries and throughput at Escondida mine, leading to mined copper production down 13% YoY in Q2 FY2021.
• On a positive note, due to consistent production, titanium dioxide slag production was up 14% YoY in Q2 FY2021.
• However, due to labour and equipment availability issues, production of pellets and concentrate was down 2% YoY in Q2 FY2021.
• In Q2 FY2021, RIO entered into four partnerships to make further progress on its efforts to decarbonise its value chain.

Financial Ratios (FY2020)

 Share Price Performance Analysis

  (Source: Refinitiv, Research done by Kalkine Group)

On 21 July 2021, at 7:15 AM GMT, RIO’s shares were trading at GBX 5,797.00, down by 0.67% against the previous day closing price. Stock 52-week High and Low were GBX 6,788.00 and GBX 4,208.38, respectively.

On a daily chart, RIO's price is sustaining above 200-day EMA of about GBX 5,632.00, indicating the possibility of an upward movement. The 200-day SMA of about GBX 5,643.00 is also sustaining below the stock price. Hence, there could be an uptick in the stock price in the near term. The MACD line is trading below the centreline, however, forming a positive crossover with the signal line. The momentum indicator RSI (14-period) is trading at ~42.06 level and moving towards the oversold zone.

In the last two years, RIO’s stock has delivered a decent positive return of ~23.87%. Also, it has outperformed the FTSE All-Share Industrial Metals and Mining index with a return of around 8.92% and the FTSE 100 index with a return of about negative 8.43%.

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

Business Outlook Scenario

RIO delivered a resilient production performance in Q2 FY2021 amid challenging conditions. Due to consistent production, titanium dioxide slag production was up 14% YoY in Q2 FY2021. Continuous investments and key exploration and development projects in the pipeline provide further confidence for FY2022. The Company could benefit from favourable commodity prices, stable demand from China and recovery in the US markets, global economic growth, significant investments in projects and its sustainability initiatives going into FY2022. The management believes in investing in sustaining and growing the Company’s portfolio and working on its ESG credentials to make further progress. The Board is confident that is had identified the right priorities to strengthen its business.

Considering the Company’s exploration and development pipeline, its sustainability initiatives, the decent profitability, liquidity and leverage position of the business, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Rio Tinto Plc at the current price of GBX 5,797.00 (as of 21 July 2021 at 7:15 AM GMT), with lower-double digit upside potential based on 6.21x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

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

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

*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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