Rio Tinto Limited (ASX: RIO)
RIO is involved in the production of gold, copper, iron ore, aluminum, coal, titanium dioxide, borates, and other minerals and metals.
Recommendation Rationale – SELL at AUD 120.86
- Financial Performance: In 1HFY23, the company’s net cash generated from operating activities went down by 33.4% YoY. The decline was due to lower pricing and a build in working capital, partially offset by higher volumes. Free cash flow stood at USD 5.6bn, which was impacted by reduction in capital expenditure, following completion of brownfield mines in 2022. Underlying EBITDA went down by 24.8% in 1HFY23 on a YoY basis. Movements in commodity prices resulted in a USD 3.3bn decline in underlying EBITDA on a YoY basis.
- Outlook: The company expects to incur Capex of USD ~7.0bn in FY23. Pilbara Iron Ore unit cash cost is expected to be USD ~ 21.0-22.5 per wet metric tonne. Production of Pilbara Iron ore is expected to be ~320-335 million tonnes. Production of Bauxite is expected to be ~54-57 million tonnes.
- Emerging Risks: The company is exposed to changes in prices of commodities like Aluminium, Copper. Further, an ongoing shortage of skilled labour could affect the operational and financial performance of the business.
- Overvalued Multiples: On a forward 12-month basis, key valuation multiples (EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book) are higher than the median of the Metals & Mining’ industry.
RIO Daily Chart
Valuation Methodology: Price/Earnings Approach (FY December'23E) (Illustrative)
Given the macroeconomic factors, volatility in commodity prices and other material business risks, etc, the company might trade at a slight discount to its peers. For valuation, few peers like BHP Group Ltd (ASX: BHP), Iluka Resources Ltd (ASX: ILU), and Imdex Ltd (ASX: IMD) been considered. Considering the current trading levels and risks associated, downside indicated by the valuation, it is prudent to book profit at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the current price of AUD 120.86, as of November 1, 2023, at 3:30 PM AEDT.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
Note 1: Past performance is neither an indicator nor a guarantee of future performance.
Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is 1 November 2023. The reference data in this report has been partly sourced from REFINITIV.
Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.
Note 4: Dividend Yield may vary as per the stock price movement.
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