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Rio Tinto update Oct 15th, 2019

ISIN: GB0007188757

Rio Tinto is a very profitable mining company with revenues of 40.5 bn$/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 aluminium business has the lowest profit margin. The company is a dual national company listed at the LSE (PLC 1,263,130,959 Bn shares)  nd Australia (Ltd 410 mio. shares) (oct. 04th,2019)

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 

A main reason to buy in Rio is the shareholder friendly dividend, an interim dividend of 1.73$/share plus a final dividend of perhaps 1.6 $ that is paid out 100% as the share is registered in the UK. It adds a share buy back program and the low PE. A share price of 70$ 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 3 years. The Australian iron ore production reached record sales with 826 mio to in 17/18 an annual increase of 8.5%. Investment in Austalian iron ore mining reached 6.1bn$ in new projects and 5.5bn$ other investment (20). The production increase in Australia will compensate the lower brazilian production. All in all the estimated 2019 iron ore price might by at average in the high 60ies ($/ton). That means Rio`s iron ore revenues could reach 2019 >24bn$ and a 72% EBITDA margin.  

Rio did divest its coal business, the Grasberg mine and got a lot of cash for it in 2018. The actual high iron ore It seems probable that Rio will invest it in the copper business. It is to hope they will wait for a good opportunity. If not Rio will probably either start a new share buy back program or pay an extra dividend for 2019 as well or both of them.  

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 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 in line with 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.   

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.  

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 tried 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 (African business system). 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. Hence Rio is evaluating options how to develop it or better not to develop it in the best way (39).   

The Koodaideri iron ore mine in Australia investment 2.6 bn$ (9)(10)(23) is a new projects in the pipeline (status approval). 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. Potentially it is developed faster than die Resolution project. 

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. 

The remainder does make s.o. enthusiastic. 

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

Main Competitors

BHP Group and Vale 

Some Numbers: 

Revenues: 20.7 bn$ H1/19

Free cash Flow: 3.9 bn$ H1/19,  7 bn$ 2018

Net Earning: 4.13 bn$ H1/19,  13.6 bn$ (including divestments!) 2018

Capex: 2.4 bn$/H1 19   1/2 on development projects, Capex expected to be around $6.0 billion in 2019 and around $6.5 billion in 2020 and 2021. 2.5 bn of it is necessary for sustaining operations. 

Net debt: 4.86 bn$ H1/19, 8 bn$ (2018)

Underlying net earning: 8.8bn $. 

EPS/share: 2.51$ H1/19,    7.88$ 2018 (800m write down Oyu Tolgoi h1/19)

Dividend19: 151c (interim) + 61c (special dividend) paid sept. 19

 
Iron Ore Production 2018: 338mio av. realized price 62.5$/to (23) about 21 bn$ revenue, guidance 2019 320 - 330 mio to. (37) Rio expects in fiscal 2019 unit cash costs (H1/19) of $14.6 per wet metric ton and excluding freight. 

Aluminium production 2018: 3.5 mio to av. realized price 2470$/to (23) about 8.6 bn$ revenue. Guidance 2019 3.2 - 3.4 mio. to due to the sale of the Dunkerque smelter

Alumina production: 8.0 mio to (2018) 474$/to, guidance 8.1 - 8.4 mio. to 2019 (20)(23)

Bauxit Production 2018: 50.4 mio to, 38.7$/to ,guidance 56 - 59 mio. to (2019) (20)(23)

Copper Production 2018: 0.634 mio. about 3.6 bn $ revenue , Guidance 2019: 0.55 - 0.6 mio to (2019) (17)(23) about 3.6 bn $ revenue 

Uranium Production (2018) 3.014 million pounds U3O8 (1158 tU) in 2018,(18) about 950 mio. $ revenue. The Roessing uranium mine is sold to China National Uranium Corporation

Estimated Diamond production: 18 mio Karat (2018) Guidance 2019 15 - 17 mio carat. (23)

Titan Dioxide Production 2018: 1.1 mio to. Guidance (2019)(19)  1.116 mio. to

Production results Q1/2019: 69 mio. to iron ore (32), 0.8 mio. to Aluminium

Underlying EBITDA

                              H1/19                         H1/18

Iron Ore                  7,552                          5,685                     33 %

Aluminium              1,127                          1,831                     (38)%

Copper & Diamonds 1,213                          1,360                     (11)%

Energy & Minerals       954                         1,008                       (5)%

Other operations         (88)                           (27)                     (226)%

Product group total  10,758                        9,857                        9 %

Underlying earnings

Iron Ore                    4,506                       3,231                         39 %

Aluminium                    315                          871                        (64)%

Copper & Diamonds      348                          450                         (23)%

Energy & Minerals          341                         464                         (27)%

Other operations           (80)                         (67)                        (19)%

Product group total       5,430                     4,949                          10 %

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 

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

(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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