Rio Tinto update jan, 18th, 2019

ISIN: GB0007188757

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.  

Morgan Stanley estimates an 2019 iron ore price in the low 60ies ($/ton)(15). That means iron ore revenues for Rio of >20bn$ and an EBITDA of 2/3 of it.  

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. Actually it looks like iron ore prices are tumbling lower on fears of a cooling of the chinese economy due to the trade dispute with the USA (8).

The Australian iron ore production reached record sales with 826 mio to in 17/18 an annual increase of 8.5%. 6.1bn$ investment in new projects and 5.5bn$ other investment (20). The risk of an overproduction is increasing.  

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)(7). The uranium business is becoming divested in an environement of 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. 

Observations

Exploration

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 Koodaideri iron ore mine in Australia investment 2.6 bn$ (9)(10) is one of the few new projects in the exploration pipeline. The remainder does not create enthusiasm. 

Some Numbers: 

Estimated Iron Ore Production 2018 338mio to (19)  (guidance):  345 mio to (2019) (17) about 21 bn$ revenue

Aluminium production: 3.46 mio to (2018) (19) about 7.4 bn$ revenue, 3.2 - 3.4 mio. to (2019)(20)

Alumina production: 8.0 mio to (2018), guidance 8.1 - 8.4 mio. to 2019 (20)

Bauxit Production: 50.4 mio to (2018), guidance 56 - 59 mio. to (2019) (20)

Estimated Copper Production: 0.55 - 0.6 mio to (2019) (17) about 3.6 bn $ revenue 

Uranium Production (2018) 3.014 million pounds U3O8 (1158 tU) in 2018,(18) about 950 mio. $ revenue. 

Estimated Diamond production: 18 mio Karat (2018)

Titan Dioxide Production: Guidance 1.116 mio. to (2019)(19)

EBITDA Margins (5): 

Iron Ore    Aluminium         Copper & Diamonds         Minerals & Energy

67%             35%                         45%                              36%

Shareholders   (marketscreener (4) oct.2018)

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%

Holdings

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

Australia                                           545

Brazil                                                280

Canada                                             29

China                                                210 

India                                                 120

Russia                                                60

Sweden                                              16

World total (rounded)                         1,500 

Some News 

Rio has to close down the Ranger uranium mine starting end of 2020 as the Aborigines does not extend the mine operation permission bejond begin of 2021. It produced 2000to UO2 in 2018. That means revenues of 220 mio. $ (contract prices).  Ranger’s rehabilitation program requires a further $296 million, taking the initial provision from $512 million up to $808 million (16).

Due to a requirement of the mongolian government Rio is asked to etablish a power plant for its large copper mine in Mongolia. The construction at the 300 megawatt plant for Oyu Tolgoi is scheduled to start in 2020, and commissioning is expected mid-2023.(14)

Rio plans a going public for the Canadian iron ore mines in H1 2019. The target value of this business is about 4 bn$ (13)

Rio sold its stake in the Grasberg mine in Indonesia due to a pressure from the government for a nationalization for 3.5 bn$. (12)

Rio sold its European Alu smelters, France, Island. I assume that their cost competitivness is lower than the Canadian operations (11).  

To Main Page

Some References

(21) 2019, Jan 23 https://www.australianmining.com.au/news/western-australia-drives-mining-comeback/

(20) 2019, Jan 18 https://www.spglobal.com/platts/en/market-insights/latest-news/metals/011819-rio-tinto-to-raise-alumina-bauxite-output-in-2019

(19) 2019, jan 18 https://www.investegate.co.uk/rio-tinto--rio-/rns/rio-tinto-fourth-quarter-production-results/201901180700024447N/

(18) 2019, jan 18 World Nuclear News WNN News Jan 18, 2019 

(17) 2019, jan 17 https://seekingalpha.com/news/3424101-rio-tinto-2018-iron-ore-production-rises-2-percent-copper-output-jumps-33-percent?app=1

(16) 2019, jan 11 https://www.australianmining.com.au/news/energy-resources-of-australia-makes-step-toward-ranger-rehabilitation/

(15) 2019, jan 09 https://seekingalpha.com/news/3421836-iron-ores-jump-75-ton-not-sustainable-goldman-warns?app=1

(14) 2019, jan 01 https://www.londonstockexchange.com/exchange/news/alliance-news/detail/1546247461458960300.html

(13) 2018, dec 24 https://seekingalpha.com/news/3419096-reuters-rio-tinto-planning-dual-list-canadian-iron-ore-unit-early-2019?app=1

(12) 2018, dec 22 http://www.stockmarketwire.com/article/6255239/Rio-Tinto-completes-sale-of-Grasberg-mine-in-Indonesia-for-3-point-5bn.html

(11) 2018, dec. 17 https://www.australianmining.com.au/news/rio-tinto-offloads-aluminium-smelter-to-liberty-house/

(10)2018, nov 29 https://www.australianmining.com.au/news/rio-tinto-inks-3-5-billion-investment-koodaideri/

(9) 2018, nov. 28 https://seekingalpha.com/news/3412995-rio-tinto-approves-2_6b-high-tech-western-australia-iron-ore-mine?app=1&dr=1#email_link

(8) 2018, nov 26 https://seekingalpha.com/news/3412020-china-iron-ore-steel-tumble-multi-month-lows-rout-continues?app=1&dr=1#email_link

(7) 2018, nov. 26 https://seekingalpha.com/news/3411988-rio-tinto-sell-african-uranium-mine-chinese-buyer-106_5m?app=1

(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/

1. https://seekingalpha.com/news/3393667-ft-rio-tinto-talks-sell-namibian-uranium-business?app=1