Company Overview - Rio Tinto  searches for and extracts  a variety of minerals worldwide, with the heaviest concentrations  in north America and Australia. Major products include aluminium, copper, diamonds, energy products, gold, industrial minerals and iron ore. The 1995 merger of RTZ and CRA , via a dual listed structure created the present day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights in Rio as a whole.
 
Analysis - RIO reported another robust set of production data for the Dec 13 quarter. Global iron ore production was up 3 % quarter on quarter to 266 Mt. Pilbara productions in the quarter was 66.5Mt. Sales volume was 68.8Mt which is +8% quarter on quarter. Stronger production than forecast meant that Rio did not draw down as much inventory as we had expected. Copper came in better than expected driven by better recovery in the open pit operations at Bingham Canyon. 2013 mined copper production was 632 kt. Production exceeded 2013 guidance in all commodities   apart from Uranium which was expected given the leach tank failure at Rossing and ERA along with semi soft coking coal due to mine sequencing at Mount Thorley and Hunter Valley operations.

This was a good end to the year despite minor misses. While there were minor misses the major drivers of copper and iron ore are doing better than guided. RIO stated that they have exceeded their cost out targets for 2013 with  more than $2 billion reduction in operating expenditure and a US$1 Billion reduction in exploration and evaluation spend, compared to a target of US$750 Million. We believe that the cost out beat illustrates RIO’s success at improving productivity.

Price		Price % Change
Close:	64.31 (28-Jan-2014)	3M:	2.06%
52 Wk High:	72.30 (14-Feb-2013)	6M:	15.46%
52 Wk Low:	49.81 (25-Jun-2013)	1Y:	(2.39%)

Pilbara expansion is on track – Pilbara 290 Mtpa is on track for completion at the end of first half of 2014 with Pilbara 360 mtpa infrastructure online in first half of 2015. Rio is now just 15 Mtpa away from 290 Mtpa. There has been a record quarterly Pilbara Iron Ore production of 55.5 Mt and 2013 iron ore production of 209 Mt.

There was more copper from Bingham Canyon which suffered a pit failure earlier in 2013. Mined copper production of 173 kt was a great result due to better grades and throughput at Bingham, better throughput at Escondida with the ramp up of Lguna Seca, and some attributable production from Grasberg. Copper production for 2013 of 632 kt has well and truly exceeded guidance of 592 kt. RIO’s net debt will decline US $ 1.2B after the completion of the TRQ rights issue. The rights issue effectively replaces part of the proposed project finance facility and is therefore swapping higher cost project debt for lower cost corporate debt.

	Industry Median	2012	2011	2010	2009	2008
Profitability
EBITDA Margin	22.1%	29.3%	50.1%	45.7%	34.0%	37.7%
Operating Margin	10.8%	(6.8%)	22.0%	35.5%	18.6%	18.8%
Earning Power
Pretax ROA	2.3%	(2.0%)	11.4%	19.5%	8.4%	9.6%
ROE	3.9%	(6.1%)	10.5%	28.1%	16.5%	19.8%
Leverage
Assets/Equity	2.06	2.54	2.28	1.94	2.22	4.34
Debt/Equity	0.42	0.58	0.41	0.27	0.54	1.95

Highlights
Iron Ore
Rio’s global iron ore production increased 3% Quarter on Quarter to 70.4 Mt with the ramp up of the stage 1 Pilbara expansion. Rio has beaten their 2013 production  guidance of 265 Mt producing 266Mt for the year. Sales from Pilabara increased 7% QOQ to 68.8
Mt exceeding production by 2.4 Mt and equating a shipping rate of 275 Mtpa.
Copper
Mined copper production of 173 kt was a great result due to better grades and throughput at Bingham, better throughput at Escaondida with the ramp up of Laguna Seca and some ttributable production from Grasberg. Grade and throughput at Bingham were both better and it is clear that the mine fleet is focused on mining ore over waste and on the highest grades. Head of grades of 0.56% is well above the reserve grade of 0.49%. The ramp up of  Oyu Tolgoi continues and the concentrator is now running close to design capacity of 100 ktp/d.  Ot produced 77 Kt of cu in 2013. RIO’s holding in TRQ  (Canada-based Turquoise Hill Resources Ltd. ) remains unchanged at 50.8% following the recent US$2.4 billion TRQ rights issue. Rio tipped in $US 1.2 billion (from debt) and will receive US $2.4 billion of debt repayments back from TRQ.
Aluminium
 Aluminium production was down 1% quarter on quarter at 868kt, predominantly reflecting the closure of the Shawinigan smelter in Canada which was partly offset by the Phase 1 69 ktpa Arvida smelter reaching full capacity.
Alumina production of 2582 kt was 13 % higher than 3Q . The Gove refinery will start ramping down in February and will be fully shut in July. Bauxite production was strong at 11.4 Mt (another new quarterly record), 2% up QOQ. Third party demand is the key driver due to the onset of the Indonesian export ban.
Energy
RIO produced 35 Mt of coal from their Australian operations in 2013, ahead of guidance of 34 Mt. Thermal coal production was down 11% QOQ due to mine sequencing in NSW but production was 11% above our expectations. Coking coal production of 2.4Mt was up 7% QOQ and 7% above our forecast as Hail Creek and Kestrel Continued to ramp up. Production from Mozambique was flat QOQ at 276kt.
Diamonds and Minerals
Tio2 production of 361kt declined 3% QOQ. The partial restart of the UGS circuit in Canada was offset by the shutting of production in Madagascar. Market productions remain weak for Zircon, slag and rutile. Diamond production of 4.5 Mct was from the higher head grade at Argyle from the underground and higher throughput at Diavik.

	2012	2011	2010	2009	2008
Total Revenue	50,942	60,537	55,171	40,262	54,264
Total Operating Expense	54,393	47,189	35,563	32,756	44,070
Net Income After Taxes	(3,020)	6,775	15,195	5,784	5,436

 

Dividend
Yield	2.434263	FY
	1.888565	5yr Av

 
RIO has a very high quality suite of assets that are generally have low operating cost, long life, expandable and mostly located in the low risk countries, offering above average returns and operating margins. We are putting a BUY on Rio at the current price.
 
 
 
 

---

Disclaimer
Kalkine provides general advice on securities. Kalkine does not provide advice that takes into account your, or anybody else’s investment objectives, financial situation or needs. We strongly suggest that you should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. Employees and/or associates of Kalkine Pty Ltd may hold one or more of the stocks reviewed on this website. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.