Stock Brief - Rio Tinto (LON:RIO)

6th Dec '21 by Keelan Cooper

22 comments 5498 reads

Since reaching highs of over £65 a share in May 2021, mining giant Rio Tinto has seen its share price drop by nearly 30% after a rapid slump in iron ore prices, project delays and environmental concerns.

Chinese industrial demand has fallen substantially after more stringent measures on steelmakers were imposed by the government. A slowdown in the construction sector has also impacted demand for iron ore, and prices have halved in recent months.

Despite the unfavourable pricing environment for iron ore, Rio Tinto has managed to generate over $50 billion in free cash flow over the past 5 years, return substantial dividends to shareholders and currently qualifies for 12 guru screens on Stockopedia. Does the easing of iron ore prices really change the investment case for a diversified mining heavyweight such as Rio Tinto?

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What are the company's principal business activities, how does it generate its revenues?

Rio Tinto is a mining company, engaged in the extraction and processing of raw materials that are crucial to society. Operating in 35 countries across the globe, Rio Tinto’s mining activities can be divided into four primary product groups: Aluminium, Copper, Minerals and Iron Ore.

Source: Rio Tinto Investor Slides

The company is a global leader in aluminium production, with large scale bauxite mines, aluminium refineries and smelters. The vertical integration of its aluminium activities has enabled the company to become the most profitable integrated aluminium producer in the world.

The fundamental demand drivers for copper are expected to push prices higher over the next decade. Copper is needed for electrification and our transition to a low-carbon future. The metal will be critical for power generation through renewables as well as for electric vehicles.

Rio Tinto’s copper mines today are predominantly located in Chile, the US and Mongolia. In Mongolia, the company’s Oyu Tolgoi mine, which is expected to commence production in 2023, will become the 4th largest copper producing mine in the world.

The company’s Minerals division is equally important. It produces a wide range of materials that are paramount to end user industries, ranging from agriculture to renewable energy.

The minerals include: Borates, Diamonds, Iron Ore concentrate & pellets, Titanium Dioxide and Uranium. It produces these materials from operations in Africa, Canada and the US.

A dominant…

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ForAFewDollarsMore

6th Dec '21

Thanks for this article. It gives a good insight into the outlook for the sector.

I hold Cadence Minerals (LON:KDNC) which is reopening an iron ore facility in Brazil. A principal risk in my opinion on top of the usually considered operational aspects is a drop in demand for iron ore and/or a weakening of price. The article gives food for thought.

AnonymousUser1822519

Sylvania Platinum (LON:SLP) is my preferred commodity stock to be in right now, far more than Rio. Rio is also in a longterm downtrend, whereas SLP is currently trading sideways inside a rectangle of c.30 percent height. As the price is near the rectangle's base, the swing back up will quickly result in a nice 30 percent profit. I would hold longer though if there is a upward breakout of the rectangle.

Also, prefer the fundmentals of SLP: EV to EBITA is a measly 1.46 on Stockreports, thereby reducing the risk of a downside breakout. Rho prices will go back up again when the chip shortages situation improves over the next year or two, and its seems to have found a solid bottom in the price too, all very nice for future earnings. On the other hand, hard to say how long the Rio's iron situation will last for, plus while iron ore's price has bounced off a low, it hasnt stablised long enough to feel confident enough that it couldnt drop a little more.

Good to see some coverage of commodity stocks at last. Because it's straightforward to check the price of commodities on which the stocks are based, working out future earnings is a simpler task and makes trading them less risky imo as there are fewer unknowns in the equation.

DaviStoVest

7th Dec '21

Good to see some serious coverage of resource stocks on Stockopedia. It's an interesting and important potential area for profitable investment over the coming twenty years, I believe, given likely investment in infrastructure and the effort towards shifting towards a low carbon economy. Also important as a hedge against higher inflation.

Pentago

I would also like to thank you for research on a large cap, commodity stock. I agree with sentiments expressed that commodity investments have significant potential over the remainder of this cycle, as the companies have generally under invested and concentrated on cash flow/distributions, resulting in potential supply tightness down the road. I am particularly positive on the copper story, happy to buy Antofagasta (LON:ANTO) here (like Lithium too - but tough to find value here). I am also a buyer of the PGMs (Sylvania Platinum (LON:SLP), Tharisa (LON:THS)) here, and Gold (got to bounce when inflation bites and Crypto lunacy implodes). Have been buying Rio Tinto (LON:RIO), would like lots more Glencore (LON:GLEN), but price sensitive. Whilst Copper is an obvious bet on electrification and distributed generation, I also believe Iron Ore will come back as China, US and other economies step up infrastructure projects. I believe too much negativity around current China housing clamp down - leaders aware that they need to maintain economic growth (and they have been doing everything they can to suppress commodity price inflation, which only works for a while).

Breakout Trader

Excellent article, thanks Keelan.

Caper4

superb analysis Keelan. I hope it won’t be long before you are a full time employee at Stockopedia :). Also great to see articles on large caps and mining stocks especially as Paul never covers them .

dfs12

A great article and prescient too. I hold Ferrexpo (LON:FXPO) Rio Tinto (LON:RIO) and Bhp (LON:BHP) - they have all hade a torrid time in the last few months. Happily they've taken off in the last few days. Intra day changes as I type Ferrexpo (LON:FXPO) up 5.5%, Rio Tinto (LON:RIO) up 4% and Bhp (LON:BHP) up 3.2%. The changes correlate with iron which has plummeted up until the last week or two. But looks like things have turned - iron ore up 9 days out of the last 11. Might be a good buying opportunity for those not yet fully allocated to the sector (which counts me out sadly).

Wolfgang Paul

Thank you, Keelan, for the great RIO analysis. As a commodity investor, I feel confirmed

Harry Hindsight

Danger Will Robinson.

Thornabian

9th Dec '21

The one thing to watch out for with Rio Tinto and other commodities is when supply chains improve and reach optimal levels, sending prices down.

This happened in 2014 and Rio Tinto fell but given the current large sell-off, it seems mostly priced-in.

Also, the Baltic shipping index: cost of shipping mainly used for these commodities, has dropped significantly which was one of the reasons commodity prices became so inflated but there is a significant amount of US and EU demand inflation expected from very loose fiscal spending which will offset that.

I bought Rio Tinto last week for the first time and commodities are my favourite sector but it does well in inflation so I wanted the balance in my portfolio; given the sell-off.

Hartshay

Rio is a good play on commodities but look to Canada, USA and Australia for majors with huge leverage to the upside. There is lots going on with non lse companies .. of which more coverage would be appreciated

skyvan

What do you mean by "doubles down on copper production"?

Keelan Cooper

10th Dec '21

Hi Caper4,

Thank you for your kind words!

We'll continue to cover large caps and mining stocks moving forward, in addition to the SCVR!

Kind regards,

Keelan

Hi Hartshay,

Thank you for your comment.

I do agree with your sentiment that there are plenty of great commodities plays across the Australian, Canadian, and US markets. Fortescue Metals, Grange Resources and Champion Iron look interesting for iron ore. I also like the look of Sandfire Resources and Taseko Mines for copper exposure.

Plenty more for us to cover internationally in the future!

Kind regards,

Hi Guybrush,

Sylvania Platinum (LON:SLP) does possess some excellent all-round fundamentals and is arguably one of the top picks in the PGM space. I believe that there are plenty of commodity stocks that are fundamentally undervalued right now, especially given the high-inflationary environment we are about to enter.

On the topic of investing in commodity stocks, I feel that you've hit the nail on the head here. You do need to take into account more macro factors, and regulatory/environmental risks, but it is a much simpler task to forecast future earnings based on modelled production schedules (with some variables applied of course).

I personally also look into the longevity of mining reserves, indicated and inferred resources, all-in sustaining costs, enterprise value per ounce (or tonne), and try to work out potential future exploration upside. You can gain a much more in-depth understanding of future earnings potential than in other industries.

Hi skyvan,

This is a figure of speech to highlight that Rio Tinto will be investing more heavily into growing its copper production in the coming years.

That was supposed to say aren't* my favourite sector.

Haraldos

11th Dec '21

Many thanks, Keelan for a balanced view. I tent to invest in mining companies for the long term, not speculation. Rio Tinto's profits are sensitive to demand. Its ability to adjust its costs accordingly is a concern along with threats of polution control (a good thing). Is its cash a really good cushion against such future fluctuation while maintaining its predicted yeild?,

Boon

28th Dec '21

Controversy and setbacks are par for course for complex mining projects. The key in 2022, for me, is whether they can get two transformational projects progressing:

Mongolia copper mine expansion. Looks like the spat with the govt is finally reaching the logical conclusion; Rio paying more. Once operational, I believe it would be one of the largest copper mines in the world, and diversify Rio away from Iron Ore further.

Serbia Lithium project. This is going to be a gem. This will happen; despite local opposition. Too much strategically is at stake, for Europe not to have its own source of lithium production, rather than rely on South America and China.

For investors that sit tight for the next few months, there's the final div coming. Which is going to be a whopper.

Sharemaster

20th Feb '22

LON:RIO expected to announce highest ever divi when reorting on Wed 23rd Feb 2022. See Sunday Times Business 20th Feb 2022.

Stock Brief - Rio Tinto (LON:RIO)

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Keelan Cooper

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