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.
Summary:
• 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
