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Rio Tinto update April 17th, 2020 

ISIN: GB0007188757

Rio Tinto is a very profitable mining company with revenues of 45 bn$/yr. and a strong emphasis on iron ore. Nearly 1/2 of the revenues and 3/4 of the profits of Rio are generated by the iron ore mining in Australia. The remainder are an aluminium and a copper business. The aluminium business has the lowest profit margin. The company is a dual national company listed at at the LSE (PLC 1,247 mio  shares)  and Australia (Ltd 371,216,214 shares) in total 1,621,139,888  (June 30th,2020)

This is not a recommendation or proposal to do anything. The data written in this article is not guarranteed. It is my private personal opinion. I`m not independing as I own a position of Rio Tinto shares. 

Opportunities and Risks 

The corona panic seems not to show a significant influence on Rio Tinto. Due to the strong iron ore demand from China on the one side and ongoing production disturbance in Brazil iron prices are on a record high and Rio earns very well with iron ore. Disadvantage 90% of the earnings are from iron ore. That means the company depends completly on iron ore. 

The Q3 production report shows stagnating iron ore shipments but a decline in copper production by about 10%. This is caused by lower copper grades at the Kennecott mine. All in all flat numbers.  

A main reason to buy in Rio is the shareholder friendly dividend of about 3$, divided in an interim dividend plus a final dividend that is paid out 100% as the share is registered in the UK. The P/E is actually (July 29) about 10 very moderate. A share price of 75$ 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.  

Due to a tailing dam break at a Vale mine in Brazil and the shut down of other mines the Vale production will be about 10% lower in the next 2 years which provides a high profitability to Australian iron ore miners. 

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).

Rio spends about 6 bn$ annually on capex. This capex is mostly spent 1/2 to sustain the actual equipment, reserves and it seems that it is not sufficient to compensate the depletion of reserves. 

A major risk is the Oyu Tolgoi mine in Mongolia. Since a couple of years Rio is in trouble with the government blocking the further expansion of the mine. I guess that the compliance rules does not allow Rio to smoothen the relation to the government. The risk is that Mongolia will block the mine completly (26). The copper/gold grades of this mine of 0.46% Q2/19 vs. 0.57% in Q1/19 and gold head grade of 0.31g/t vs. 0.58g/t in Q1/19 (44) seem not to justify the political risk. 

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.   

Rio did as well increase the number of female board members as part of a gender initiative to please left ideologic investors (54).  

Observations

Rio is like many other companies affected by NGO that buy a few shares, forward bids to decrease CO2 emissions of Rio and its chinese customers (24). Left media gives such events a lot of attention.  The spending for green nonsense "$1 billion climate-related spend over five years" seems to remain liveable. 

Exploration

Simandou is the biggest known and not developed iron ore deposit in the world. It is situated in Guinea (West Africa), approximatly > 2bn tons of ore. It is divided into four blocks, with blocks 1 and 2 controlled by a consortium backed by Chinese and Singaporean companies, while Rio Tinto  and Aluminum Corp. of China own blocks 3 and 4. Now it seems that China plans to approve the development of this deposit(57).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 iron ore demand are not rising anymore Rio tried so sell its stake of 45% (3). Chinas motivation to develop this deposit are mainly to increase iron ore supply and decrease the dependence on iron ore from Rio and Vale. 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 (African business system). Hence Rio is evaluating options how to develop it or better to delay the development in the best way.   

The Koodaideri iron ore mine in Australia investment 2.6 bn$ (9)(10)(23) is a new projects in the making. Another one is the Oyu Tolgoi underground project. 

The Resolution Copper Project in Arizona that should produce 1/2 million tons of copper - about 3bn$ revenues/yr over 40 years is a major project (29).  It is a 55% Rio/45% BHP project in its permitting phase. 

Oyu Tolgoi copper and gold mine is in trouble the government plans to renegotiate the conditions (45). The expansion project (underground mining) in Mongolia is in trouble as well. Due to geological issues the will not start producing copper until between May 2022 and June 2023, a delay of 16-30 months. The capital cost of the project increased to $6.5B-$7.2B, up from an original estimate of $5.3B (43). The main question is if western miners with its compliance rules can make business in the future in such countries or is chinese, russian countries only. 

The Winu copper exploration project in the Paterson province in the state’s north in Australia is very promising. Rio reports an inferred mineral resource for Winu of 503M metric tons of ore grading at 0.45% copper equivalent and includes a higher-grade component of 188M tons of ore with a 0.68% copper grade (59). Total 3.5 mio. tons of copper. That is an annual production of 150.000tons for 20 yrs.  Rio Tinto plans to reach first production at the Winu copper-gold project in Western Australia in 2023, and is progressing discussions with the Traditional Owners to achieve this (56)(59).

A Lithium project is studied near the town of Loznica, in western Serbia. The decision is planned to be met in 2020. If it is a go a head decision production could start in 2023. 

In the long run, 8 - 10 years, the La Granja project in Peru might become a major copper asset for Rio (see news).

The Paterson copper/gold project is in a early stage, 

Main Competitors

BHP Group and Vale 

Some Numbers: 

                                     Estimate 2020    H1/20    2019   H1/19   2018

Revenues  bn$:                                       19.4       45.4    20.7     42.8

Free cash Flow bn$:                                 2.81       10                      7 

Net Earning bn$:                                     3.3           8        4.13      13.6 (incl. divestments!) 

Capex bn$ :                          6                             5.5        2.4   

Dev. share of Capex %:                                         47%

Net debt bn$:                                         4.8         3.7     4.86       9, 8

EPS/share $:                                          2.94       6.36    2.51      7.88

Dividend c/share:                                   155**     443                  550

**Ordinary interim dividend

*Revised 04/20 due to corona panic

 

Production

                                                 2020 (Guidance)  2019     2018

Iron Ore (mio. to)                        330                   327       338

Aluminium (mio. to)                     3.2                    3.17       3.5

Alumina (mio. to)                          8                       7.7          8

Bauxit Production (mio. to.)          56                     55          50.4 

Copper Production (1000to)         500                     577       634  

Diamond production (mio carat)    13                      17          18 

Titan Dioxide Production (mio. to)  1.3                 1.21       1.1

 

 

It was iron ore only that achieved positive numbers. Rio depends mostly on it.  

 

Shareholders   (marketscreener (4) oct.2018)

Name                                                                                      Equities               %

Aluminum Corp. of China Ltd. Chinalco                                    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 

2020/03/16 Rio Tinto that underground work - mine expansion - has been slowed at its Oyu Tolgoi project in Mongolia due to restrictions that Mongolian authorities have put in place to contain the spread of the coronavirus. Government restriction on expats. 


2020/02/18 Rio Tinto reduced its iron ore production guidance for 2020 to 324M-334M metric tons 2020, down from previous guidance 330M-343M mt. (53)

2019/11/27 and 2019/12/03 Rio Tinto and First Quantum Minerals had early stage talks about a development of La Granja, one of Peru's biggest untapped copper projects. Rio won the right to develop La Granja in 2005 but has not made a final investment decision; although the project has the potential to be one of the world's biggest copper mines, the deposit is rich in arsenic, so the material would need to be processed before being sent to smelters(50). Other issues are the scarcity of water in the region that is needed for processing and a resisting local population (51). Perhaps it will need as well additional infrastructure as the area is 1000 Km away from the capital. 

2019/11/22 The Oyu Tolgoi copper mine is owned by the Turquoise Hill Resources 66% - Rio owns a majority of it - and the Mongolian government that owns 34% under investment terms agreed in 2015. Mongolian lawmakers approved plans to revise the deal, hoping to add benefits for ordinary citizens (themselve?). The recommendations approved by parliament include replacing the 34% interest with a special royalty and bringing forward the date - currently set at 2041 - when Mongolia begins receiving dividends.

I love socialist governments that change laws with backwardation!

2019/11/05 Rio Tinto completes Oyu Tolgoi Shaft 2 construction

2019/06/25 The Norway's $1T wealth fund can invest again in RIO after its exclusions from the fund's investments on ethical grounds was revoked. The fund, one of the world's largest investors, has an ethical mandate set by parliament and is not allowed to invest in companies that produce nuclear weapons, cluster munitions and tobacco, among other ethical (ideologic and green religious) criteria.

2019/06/20 The September iron ore contract on the Dalian Commodity Exchange settled +3.9% to $121.01/ton. - the highest level since 2013. Spot prices of iron ore for delivery to China were at five-year peaks of $114/ton for the 62% grade, $128 for the 65% grade, $102 for the 58% grade, and $82.50 for the 52% grade, according to SteelHome consultancy(38).

2019/06/19 According to analysts an iron ore deficit of 100.4 million tonnes (Fe) is predicted in 2019 and 57 million tonnes in 2020. The price of iron is now above 100$/ton (62% Fe). This deficit is going to drain stockpiles and create a structurally tighter market for several years until new production comes online (from 36). My personal assumption is that the iron ore market most probably in a surplus 2021 when the brazilian mines come back to full production. Till then Rio will earn an awful lot of money. 

2019/05/17 Iron ore price hits five-year high after Vale warns of dam risk. The price of iron ore pushed past $100/mt for the first time since May 2014. Reasons are a reduced supply from big miners and strong steel demand from China (35)

2019/04/16  Iron ore production fell in Q1/19 to 76M mt. Q1 copper production rose 3% Y/Y to 143.9K mt,  aluminum output was stable at 796M mt and bauxite production improved 1% to 12.76M mt.

2019/04/10 Chinalco the biggest shareholder voted against a resolution to repurchase shares at the miner’s annual general meeting today in London. The reason for ACH's vote against the resolution - which passed in a close vote - is not clear, but if the firm's stake rises above 15%, it would breach a threshold agreed with the Australian government and could be forced to sell shares (28)

2019/04/09 Rio Tinto global tax payments 2018, total $6.6 billion of taxes and royalties, up from $5.1 billion in 2017. Australia $4.8 taxes. The remainder was accounted for by Canada ($386 million), Chile ($332 million), the United States ($331 million), Mongolia ($308 million), Europe ($146 million) and Africa ($132 million).

Rio Tinto announced that it had completed the sale of its entire interest in the Grasberg mine in Indonesia as part of a series of transactions involving Inalum (PT Indonesia Asahan Aluminium (Persero)), Indonesia’s state mining company, and Freeport McMoRan Inc. Total proceeds from the transaction were $3.5 billion, including $0.1 billion for the 2018 attributable metal share of 25.9 thousand tonnes of copper and 266.7 thousand ounces of gold, net of the capital contribution for the year. (23)

Vale said yesterday (Jan 29, 2019) it would take as much as 10% of its output offline as it decommissions a total of 19 dams over three years, a move that would cut up to 40M tons of iron ore production this year.(22) It is nearly 3% of the annual iron ore production.  

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

(59) 2020 July 28 https://seekingalpha.com/news/3595629-rio-tinto-declares-maiden-resource-australias-winu-project?utm_medium=email&utm_source=seeking_alpha&mail_subject=rio-rio-tinto-declares-maiden-resource-at-australia-s-winu-project&utm_campaign=rta-stock-news&utm_content=link-1

(58) 2020 April 17 https://seekingalpha.com/news/3561548-rio-tintos-quarterly-iron-ore-shipments-rose-despite-cyclone-hit?utm_medium=email&utm_source=seeking_alpha&mail_subject=rio-rio-tinto-s-quarterly-iron-ore-shipments-rose-despite-cyclone-hit&utm_campaign=rta-stock-news&utm_content=link-1

(57) 2020 March 5 https://seekingalpha.com/news/3549075-china-to-approve-developing-giant-simandou-iron-ore-mine-bloomberg?utm_medium=email&utm_source=seeking_alpha&mail_subject=rio-glcnf-china-to-approve-developing-giant-simandou-iron-ore-mine-bloomberg&utm_campaign=rta-stock-news&utm_content=link-1

(56) 2020 Feb. 27 https://www.australianmining.com.au/news/rio-tinto-zeros-in-on-copper-projects/

(55) 2020 Feb 26 file:///C:/Users/holge/Downloads/RT-Annual-results-2019-slides.pdf

(54) 2020 Feb 23 https://www.irishtimes.com/business/energy-and-resources/rio-tinto-looks-to-diversify-board-with-addition-of-more-women-1.4181013

(53) 2020, Feb 18 https://seekingalpha.com/news/3542517-rio-tinto-trims-iron-ore-shipments-guidance-after-cyclone?utm_medium=email&utm_source=seeking_alpha&mail_subject=rio-rio-tinto-trims-iron-ore-shipments-guidance-after-cyclone&utm_campaig

(52) 2020, Jan. 17 https://www.investegate.co.uk/rio-tinto--rio-/rns/rio-tinto-fourth-quarter-production-results/202001170700050969A/

(51) 2019, dec. 3 https://www.nsenergybusiness.com/features/la-granja-peru/

(50) 2019, nov. 27 https://seekingalpha.com/news/3522513-rio-tinto-first-quantum-talks-peru-copper-mine-ft?dr=1&utm_medium=email&utm_source=seeking_alpha#email_link

(49) 2019, nov. 22 https://seekingalpha.com/news/3521432-mongolia-approves-plan-renegotiate-mine-deal-rio-tinto

(48) 2019, nov. 5 https://seekingalpha.com/news/3514428-rio-tinto-completes-oyu-tolgoi-shaft-2-construction?dr=1#email_link

(47) 2019, oct. 16 https://www.investegate.co.uk/rio-tinto--rio-/rns/third-quarter-operations-review/201910160700060000Q/

(46) 2019, Sept. 27 https://seekingalpha.com/article/4293924-rio-tinto-plc-rio-presents-16th-annual-strategic-decisions-conference-2019-slideshow?dr=1

(45) 2019, July 19 https://seekingalpha.com/news/3479357-rio-tinto-hit-criticism-mongolia-seeks-changes-mine-deal?dr=1#email_link

(44) 2019, July 17 https://seekingalpha.com/news/3478198-turquoise-hill-plunges-time-lows-oyu-tolgoi-troubles?dr=1#email_link

(43) 2019, July 16 https://seekingalpha.com/news/3477993-rio-tintos-mongolia-project-take-longer-cost-expected

(42) 2019, July 15 https://www.miningweekly.com/article/rio-could-fast-track-key-australia-copper-find-before-us-asset-2019-07-15

(41) 2019, July 3rd https://www.investegate.co.uk/rio-tinto--rio-/rns/transaction-in-own-shares/201907021700072656E/

(40) 2019, June 25 https://seekingalpha.com/news/3473515-norways-wealth-fund-cleared-reinvest-rio-walmart-others?dr=1#email_link

(39) 2019, June 20 https://seekingalpha.com/news/3472721-rio-tinto-renews-work-simandou-iron-ore-deposit-bloomberg

(38) 2019, June 20 https://seekingalpha.com/news/3472668-china-iron-ore-price-hits-highest-since-least-2013

(37) 2019, June 19 https://seekingalpha.com/news/3472387-rio-tinto-cuts-guidance-pilbara-iron-ore-shipments

(36) 2019, June 11 https://seekingalpha.com/article/4269721-rio-tinto-poised-climb-beyond-70?dr=1

(35) 2019, May 17 https://seekingalpha.com/news/3464947-iron-ore-price-hits-five-year-high-vale-warns-dam-risk?dr=1#email_link

(34) 2019, May 15 http://www.mining.com/rio-tinto-plans-start-mining-lithium-serbia-2023/

(33) 2019, April 26 https://www.investegate.co.uk/rio-tinto--rio-/rns/transaction-in-own-shares/201904241730080078X/

(32) 2019, April 25 http://www.marketbeat.com/URL/?URL=https://steelguru.com/mining/rio-tinto-announces-production-results-for-q1-2019/538907

(31) 2019, April 16th https://seekingalpha.com/news/3450967-rio-tinto-q1-iron-ore-shipments-fall-14-percent-cuts-full-year-production-outlook

(30) 2019, April 16th https://www.australianmining.com.au/news/rio-tinto-cuts-guidance-for-pilbara-iron-ore-shipments/

(29) 2019, April 15th https://www.australianmining.com.au/news/rio-tinto-bhp-copper-project-tops-2bn-value/

(28) 2019, April 10th https://seekingalpha.com/news/3449781-rio-tinto-faces-rebellion-top-shareholder-chinalco-ft?app=1

(27) 2019, April 9th https://www.australianmining.com.au/news/rio-tinto-approves-463m-development-at-mineral-sands-project/

(26) 2019, April 5th https://seekingalpha.com/news/3448770-mongolia-lawmakers-want-scrap-2015-oyu-tolgoi-expansion-deal?app=1&dr=1#email_link

(25)2019, April 1st https://seekingalpha.com/news/3447158-rio-tinto-cuts-2019-iron-ore-output-guidance-following-cyclone-damage?app=1

(24) 2019, March 18 https://seekingalpha.com/news/3443635-rio-tinto-rejects-bid-reveal-emission-targets?app=1

(23) 2019, Feb. 11 https://www.riotinto.com/documents/190118_Rio_Tinto_releases_fourth_quarter_production_results.pdf

(22) 2019, Jan 30 https://seekingalpha.com/news/3427435-iron-ore-price-spikes-vales-production-cut-set-disrupt-market?app=1

(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

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