Rio Tinto Plc (
) is a diversified mining company involved in finding, mining, and
processing resources such as aluminum, copper, diamonds, thermal
and metallurgical coal, uranium, gold, industrial minerals (borax,
titanium dioxide and salt) and iron ore. The company has a number
of major operations in Australia and North America, with other
significant operations in Asia, Europe, Africa and South
The company was founded in 1873 with its first operation being
on the Rio Tinto river in Spain. Throughout its history, the
company has acquired whole and partial stakes in a myriad of
smaller companies allowing the company to diversify both in terms
of commodities as well as geographical presence. The largest
acquisition was in 2007 which was a purchase of Canadian aluminum
company, Alcan for $38.1B which took RIO's net debt to equity to a
dangerously high 180%. RIO is about the 4th largest publicly listed
mining company in the world based on market capitalization.
RIO has now got its balance sheet in order, which puts the
company in such a stronger and safer position. RIO was highly
leveraged in 2007 which put them in a very difficult situation once
the global financial crisis set in and commodity prices took a
dive. The company was almost taken over by BHP Billiton (
) during that period, and in the end accepted a large investment by
Chinalco, a Chinese mining enterprise, in order to meet its debt
The company is broken down into 5 business units as follows:
Aluminum: includes bauxite, alumina and aluminum. RIO is the
largest bauxite producer in the industry. A lot of these
operations are self powered by hydroelectricity
Copper: includes gold, molybdenum, silver, nickel and
copper. RIO is the worlds 5th largest producer of copper
Diamonds & Minerals: includes diamonds, borates,
titanium dioxide feedstocks, talc, high purity iron, metal
powders, zircon and rutile. RIO has a number of projects in the
pipeline in this business unit.
Energy: includes thermal coal, coking coal and uranium. Much
of its products are sold in Asia in close proximity to their
mines in Australia.
Iron Ore: includes iron ore and salt. RIO is the 2nd largest
producer supplying the global seaborne iron ore trade. Much of
its iron ore comes from Western Australia which is in close
proximity to China.
click to enlarge
Source of Data: riotinto.com
2010 was a stellar year for RIO with net income increasing from
$4.9B in 2009 to $14.3B in 2010. Most of this increase came due to
much larger volumes of iron ore produced as well as the high price
of iron ore. The revenue of the Iron Ore division, which is by far
the largest, doubled from 2009 to 2010.
The company faced challenges in early 2011 due to severe weather
conditions which hampered some of RIO's operations but the company
bounced back well in 3rd quarter 2011, which was another record
By the 12th October this year, 69 million RIO shares had been
bought back at a total cost of $4.4B. While the shareprice is below
Intrinsic Value, buying back shares is a good idea as it adds
shareholder value. RIO announced that it intends to spend a further
$2.6B in share buy-backs by the end of 1st quarter 2012.
RIO's balance sheet is healthy with a net debt to equity of 9%,
with $14B of long term debt, $1B of short term debt, and almost
$10B in the bank. It also generated an impressive $13.7B in
cashflow during 2010. RIO is a wonderful generator of cash which
places it well to purchase other assets, pay down debt, pay a
dividend, or buy back shares.
Interestingly, RIO only scores a moderate quality rating score.
This is due in part to the serious effect that the Global Financial
Crisis had on RIO and also its aggressive capital expenditure
regime. Importantly RIO scores a perfect 10 on cash flow.
RIO is well positioned to capitalize on the China growth story
should it continue. Unless China falls in a heap, RIO's IV will
continue to rise dramatically in the coming years.
The performance of RIO is in general dependent on the price of
iron ore. The hiccup in performance of RIO during the Global
Financial Crisis is plain to see. For the last few years though,
with the price of iron ore and other commodities strong, the
performance of RIO has improved drastically. For stock market
participants interested in investing in RIO, the graph illustrates
that now looks to be a good time. The value has stormed ahead, and
the price has yet to catch up.
Investment Grade Score
The Margin of Safety of RIO is 44% based on the
USAStockValuation.com method of calculating Margin of Safety which
is: (Intrinsic Value - Share Price) / Intrinsic Value. And the
Quality Rating of RIO is 65/100.
This gives an Investment Grade Score of (44 x 65) / 100 = 29
which places RIO at number 54 on the USAStockValuation.com
Investment Grade Table. By multiplying the Margin of Safety by the
Quality Rating, only those companies with a good combination of
quality and value make the upper echelons of the Investment Grade
Drivers of Future Growth
On the back of a stronger balance sheet, RIO is investing for
its future by ramping up its capital expenditure. RIO's capital
expenditures of $5.1B for the first half of 2011 already exceed the
total capital expenditure for all of 2010 which was $4.6B. The
below production profile gives an illustration of the expected
increase in production up to 2015 as a result of the current and
future projects in RIO's portfolio:
With mining companies, the general rule is the bigger they are,
the lower the costs per unit to produce. This is because high
production means economies of scale and lower cost per unit measure
of the resource being produced. Another advantage of large mining
companies such as RIO is their project execution capabilities which
have been proven time and time again over many years.
The major risk on RIO is its large iron ore division and its
subsequent dependence on the price of iron ore, which in turn is
dependent on the China growth story continuing. 28% of RIO's sales
come from China, but more importantly the urbanization of China is
propping up the price of iron ore. If China were to fall in a heap
it would be disastrous for RIO, at least in the short term. See
below an illustration on the urbanization of China with the US as a
point of reference.
Through operating large scale operations, RIO produces at a
lower cost per unit volume/weight than most of its peers. It enjoys
strong cash flows and its future looks bright. RIO is also paying a
$1.07 dividend which based on the current shareprice of $55.5
provides a yield of 1.9%.
The risk to investors in RIO is a downturn in the Chinese
economy and for those who believe the Chinese economy may dive will
want to stay away. Conversely, the current price of RIO should be
very attractive for investors who believe the China urbanization
story will continue.
: I have no positions in any stocks mentioned, but may initiate a
long position in
over the next 72 hours.
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