Rio Tinto - Q1 2013
Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto Plc, an LSE and NYSE-listed company, and Rio Tinto Ltd, which is listed on the Australian Securities Exchange. Rio Tinto's business is finding, mining and processing mineral resources. The major products it deals with are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium, dioxide, salt, talc) and iron ore. Its activities span the world but are strongly represented in Australia and the United States with significant businesses in South America, Asia, Europe and southern Africa.
- Plans to increase annual output of the Cape Preston Iron Ore Mine in Western Australia by 50% over the next five years could strengthen the company's partnership with Chinese companies.
- Rio reduced its debt from US$18.9bn in 2009 to US$4.3bn in 2011, reducing a significant weight from the company's share price performance.
- The company is restructuring its aluminium operations to improve EBITDA margins to 40% from 20% in the medium term.
- Mined copper was down 24% year-on-year (y-o-y) in 2011 due to lower grades at the company's Grasberg mine in Indonesia and the Escondida mine in Chile. Labour disputes at the Grasberg mine continue to disrupt production at one of the company's main operations.
- The company is heavily dependent on the health of the Chinese steel industry due to a reliance on profits from iron ore operations. We are particularly bearish on China's steel sector as oversupply and weak demand will keep prices subdued for the foreseeable future.
- Rio Tinto has a high exposure to cost inflation in Western Australia, where most of its iron ore production comes from.
- The company's purchase of Alcan has left it saddled with an industry beset by small margins.
- Key opportunities can be found in Rio Tinto's presence and holdings in three key growth areas over the coming years: Mozambican coal, Mongolian copper and Guinean iron ore.
- As the world's second largest miner, the company has the expertise and capital to develop the most lucrative and largest mines in the world.
- India's steady withdrawal of supply from the seaborne trade of coal to feed its own power demands could be a growth driver for Rio Tinto's coal business.
- Elevated metal prices bring the risk of greater industrial action, especially with ongoing wage negotiations at copper mines in the US and Mexico.
- Other threats include commodity price shocks, Australian dollar strength, uncertain fiscal and political regimes especially in Africa.
- Rio Tinto is heavily reliant on the Chinese economy and thus will be detrimentally affected when our forecast for a sharp slowdown in the country's growth in 2012 plays out.
Rio Tinto is well placed to enjoy significant expansion, especially in terms of gold and copper output as the gargantuan Oyu Tolgoi mine in Mongolia comes online. This mine is one of the few large-scale copper projects to come online in the next few years and will give the company an advantage over its rivals. In addition, Rio is developing the Simandou iron deposit in Guinea and the Riversdale coking coal deposit in Mozambique, both assets with large untapped reserves. Rio Tinto is dependent on continued growth in the Chinese economy because much of the company's production is for China. It also relies heavily on iron ore and hence is reliant also on the health of the Chinese steel sector, an area which we are particularly below consensus towards.
- Head Office, Melbourne
- 120 Collins Street
- Tel: +61 (0) 3 9283 3333
- Fax: +61 (0) 3 9283 3707
|Table: Rio Tinto - Key Financial Data|
|- % chg y-o-y||18.0||32.2||82.7||-22.9||31.9||9.7|
|- % chg y-o-y||26.6||4.5||80.8||-42.4||108||17.2|
|Net Income (US$mn)||7,438||7,312||3,676||4,872||14,238||5,826|
|- % chg y-o-y||42.6||-1.7||-49.7||32.5||192||-59.1|
|Profit Margin (%)||33.1||24.6||6.8||11.6||25.8||9.6|
|Debt to EBITDA||0.3||4.5||2.1||2.1||0.7||0.8|
|Source: BMI, Bloomberg|