Friday, November 30, 2018

A Current AIM Program International Equity Holding: Rio Tinto Plc, Inc. (RIO) by: Nicholas Goehring. "Time to Mine Rio Out?"

Rio Tinto Plc, Inc. (RIO, $48.98): “Time to Mine Rio Out?”
By: Nicholas Goehring, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Rio Tinto Plc, Inc. (NYSE:RIO) is the second largest mining company in the world, specializing in the extracting, transporting, and sale of raw mined metals and minerals.

• In 2018Q3 159.7 thousand tons of copper were mined, up 32% from 2017Q3, primarily from higher grades and increased production form the Rio Tinto Kennecott mine.

• On August 15, 2018 a truck operator was fatally injured at the Paraburdoo Australia Iron Ore mine and is currently under investigation.

• RIO is on track to reduce long-term debt by -30% YoY. Down to $30.3MM as of end 1H18 from $33.3 at end FY17.

• Global increase of stringent environmental protection laws restrict production and pressure mine closures.

Key points: 

It might be time to sell Rio Tinto. Even though Rio benefited strong commodity prices in 2016, commodity prices have fallen in FY 2017 adding significant downward pressures on the company’s profitability. Iron ore prices are down 18% over the last six months as trade uncertainty in China has impacted infrastructure growth outlooks. In FY 2017, iron ore made up just over 44% of Rio’s total revenues and will continue to be a significant operating segment.

Mined copper productions was 32% higher versus 2017Q3 as a result of increased production and higher grade mines. In FY 2017, copper made up 11.5% of their total revenue. Even though these efficiencies have benefited over the past 3 quarters, copper prices have also fallen 18% since their peak in early June.

Management believes that “mine-to-market” productivity systems will improve Rio to top the industries margins. Efficiencies are generated by focusing free cash flows on innovative practices and developing new technologies. In 2018, 11 Automated Drilling Systems (ADS) have drilled more than 5,000 kilometers, and they have increased their “AutoHaul” autonomous rails stems operations to an average of 34 trains per day or 290,000 kilometers per day.

What has the stock done lately?

Over the last month the stock price has traded between $53 and $46. This is dangerously close to their 52-week low of $45.62, which was reached on September 11th.  The stock price has only increased ~2% in the last 12 months. It is concerning that the stock has not grown, is it poised to go up?

Past Year Performance: 

Rio has increased 2.27% in value over the past year, but Iron Ore prices have dropped from $60.70 to $49.07 over the last six months driving the stock down 7.8% YTD. Even though they have a high dividend yield of 6.3%, they have reduced their long-term debt by almost 30% YoY. They have one of the best capital structures in the industry.

Source: FactSet

My Takeaway:

Rio’s stock performance is heavily dependent on commodity pricing and efficiency improvements. Even though Rio has made significant technological improvements and divested underperforming mines over the last 18 months, but their stock price is trading near its 52-week low. Earlier this year, both the CFO and the chairperson stepped down. It is concerning to see two senior members to leave the company at the same time. Long operating cycles and poor performing commodity markets have dampened the returns of this stock. If the commodities markets recover, the returns of this stock could be noteworthy.

Source: FactSet