Rio Tinto update nov.12th, 2018
Rio Tinto is a very profitable mining company with revenues of 40bn$/yr. and a strong emphasis on iron ore. Nearly 1/2 of the revenues and > 60% of the profits of Rio are generated by the iron ore mining in Australia. The remainder are an aluminium and a copper business. The company is a dual national company listed at the LSE (PLC 1.3 Bn shares) and Australia (Ltd 400 mio. shares).
Opportunities and Risks
A main reason to buy in Rio is the shareholder friendly dividend of perhaps 3.3$ 2018, a share buy back program and the low PE. From my point of view 60$ could be appropriate for Rio. The business develops according to the iron ore demand which is driven by China (1/2 of the world wide steel production). It means the opportunites depend on the chinese economy and its development. It effects Rio`s revenue and profit situation decisivly.
Rio did divest its coal business and got a lot of cash for it. It seems probable that Rio will invest it in the copper business. It is to hope they will wait for a good opportunity.
The main risk is the dependence on China. China did already arrest Rio managers in China as there was a dispute on Rio`s iron ore pricing politics.
Rio spends about 6 bn$ annually on capex. This capex is mostly spent to sustain the actual equipment, reserves and it seems that it is not sufficient to compensate the depletion of reserves.
Rio does not always follow the business logic. The highly profitable coal business which was a diversification from the dependence on the iron ore business was divested recently. Rio is as well going to divest its uranium business (1). The uranium business is becoming divested in an environement of very low prices which means Rio will not get a lot for it. I assume that pressure from Blackrock?? and green comunist groups (climate hoax?) did motivate Rio to do this steps against business logic. A more hungry Management would be an opportunity.
This is not a recommendation or proposal to do anything. It is my private personal opinion. I`m not independing as I own a position of Rio Tinto shares.
The biggest known and not developed iron ore deposit is situated in Guinea (West Africa), approximatly 2bn tons of ore. The main challenge that kept miners from developing it till today is the necessity to connect it to the ocean to bring the iron ore on the market. The total investment including a railway is estimated to 20 bn. $ (Rio). Owners of the project are actually Guinea, Chinalco and Rio. As expectations on demand are not rising anymore Rio tries so sell its stake of 45% (3). On the one hand there is no industrial benefit for Rio or Vale to develop this deposit as both miners have plenty of reserves in their existing developed fields. Africa is always a political risk and to invest 20bn$ in Africa is a big risk. Some Rio managers working on this project are subject of corruption investigations. On the other hand if it is developed by chinese miners the main customer China could replace imports from Rio and Vale by mined ore from Guinea and get in a better position vs. the western miners.
The exploration pipeline beside iron does not create enthusiasm.
Estimated Iron Ore Production: 340 mio to (2018) about 21 bn$ revenue
Estimated Aluminium production: 3.5 mio to (2018) about about 7.4 bn$ revenue
Estimated Alumina: 8.1 mio to (2018)
Estimated Bauxit: 50 mio to (2018)
Estimated Copper Production: 0.6 mio to (2018) about 3.6 bn $ revenue
Estimated Diamond production: 18 mio Karat (2018)
EBITDA Margins (5):
Iron Ore Aluminium Copper & Diamonds Minerals & Energy
67% 35% 45% 36%
Shareholders (marketscreener (4))
Name Equities %
Aluminum Corp. of China Ltd. 182,550,329 14.1%
BlackRock Investment Management (UK) Ltd. 86,772,665 6.68%
Capital Research & Management Co. (Global Investors) 41,121,233 3.17%
The Vanguard Group, Inc. 33,616,000 2.59%
Legal & General Investment Management Ltd. 28,707,000 2.21%
BlackRock Fund Advisors 27,173,000 2.09%
Capital Research & Management Co. (World Investors) 21,139,570 1.63%
Standard Life Investments Ltd. 17,449,000 1.34%
UBS Asset Management (UK) Ltd. 16,634,583 1.28%
M&G Investment Management Ltd. 13,961,000 1.08%
Name % Valuation
Turquoise Hill Resources Ltd (TRQ) 1,021,966,440 50.8% 2,166,568,853 USD
Entree Resources Ltd (ETG) 16,566,796 9.50% 6,295,382 USD
MINERA IRL LIMITED (MIRL) 44,126,780 19.1% 2,206,339 USD
The Iron Ore Production (mio. tons iron content) 2017 (6)
United States 28
World total (rounded) 1,500
(6) 2018, nov. 12 https://minerals.usgs.gov/minerals/pubs/mcs/2018/mcs2018.pdf
(5) 2018, nov. 12 http://www.riotinto.com/documents/181112_Presentation_JS_UBS_conference.pdf
(4) 2018, nov 6th https://www.marketscreener.com/RIO-TINTO-9590196/company/
3. oct. 29, 2018 https://www.australianmining.com.au/news/rio-tintos-simandou-purchase-agreement-lapses/
oct 17, 2018 http://www.mining.com/rio-tinto-delays-start-oyu-tolgoi-expansion-due-technical-issues/