Company Overview - Rio Tinto Limited is a mining company. The Company is focused on finding, mining and processing of mineral resources. The Company's operating segments include Iron Ore, Aluminum, Copper & Coal, Diamonds & Minerals, and Other Operations. Its products include aluminum, copper, diamonds, gold, industrial minerals (borates, titanium dioxide and salt), iron ore, thermal and metallurgical coal, and uranium. The Company's activities span across the world and are represented in Australia and North America, with businesses in Asia, Europe, Africa and South America. Its Copper product group comprises approximately four copper operating assets and over six coal operations, which includes Australia and South Africa, as well as development projects. The Diamonds & Minerals product group comprises a suite of businesses, including mining, refining and marketing operations across approximately five sectors. The Iron Ore product group operates iron ores, supplying the global seaborne iron ore trade.
 

RIO Details
 
Launched new debt reduction program: Rio Tinto Limited (ASX: RIO) has launched a bond purchase plan for up to $3 billion. The group is boosting its capital position with expectations of recovery in the iron ore prices in the coming months. Accordingly, by raising funds, RIO would be taking advantage of its strong liquidity position to further reduce its gross debt. This is a part of the RIO’s ongoing capital management and comes after the successful completion of $4.5 billion cash tender offers earlier this year. In April, Rio Tinto had launched a program to buy $1.5 billion of its 2017 and 2018 notes and in June the group reported their plans to purchase $3 billion of its 2018, 2020, 2021 and 2022 notes. Both the offers were successfully completed. In June 2016, over $1.5 billion of notes also matured, and repaid with cash. On the other side, under a new plan RIO has issued a redemption notice for over $1.5 billion of its 2017 and 2018 US dollar-denominated notes and started the cash tender offers to buy over $1.5 billion of its 2019, 2020, 2021 and 2022 US dollar-denominated notes. Additionally, RIO has reduced the gross debt by almost $2 billion in the first half of 2016 as $6.0 billion of bonds are repurchased or repaid out of cash balance, while over $4.1 billion of Oyu Tolgoi Project Finance (OTPF) is fully consolidated in the first half of 2016 while the bond maturity profile now has lower refinancing risk.
 

Bond maturity profile in US$ billion (Source: Company Reports)
 
First half of Financial Performance for 2016: RIO in the first half 2016 has reported consolidated sales revenues of $15.5 billion which is $2.5 billion lower than the corresponding period 2015, reflecting reduction due to the decline in commodity prices. RIO has reported EBITDA margin of 33 per cent, compared with 34 per cent in 2015 and 38 per cent in 2015 first half and the underlying earnings of $1.6 billion which is $1.4 billion lower than 2015 first half and cash cost improvements, lower energy costs and positive currency and other movements (totaling $0.5 billion) partly offsetting the $1.9 billion (post-tax) impact of lower prices. The Pilbara operating FOB EBITDA margins is of 58%, Integrated operating EBITDA margins of Aluminum is of 25%, Copper operating EBITDA margins is of 30% and 35% in Diamonds and for the Energy and Minerals the operating FOB EBITDA margins is of 23%. Additionally, RIO has reported the underlying earnings per share of 87.0 US cents in the first half of 2016 as compared with 159.1 US cents in first half of 2015. The net earnings are of $1.7 billion which reflect the net gains on disposals of businesses of $0.2 billion, non-cash exchange rate and derivative gains of $0.6 billion, an onerous contract provision of $0.5 billion and restructuring costs of $0.1 billion. However, the commodity prices had reduced the earnings by 65% which is partially offset by exchange, energy and management actions.
 

First half of 2016 Financial Performance (Source: Company Reports)
 
Cost Reductions: RIO has achieved almost $6.8 billion of cost reductions against 2012 base and has achieved $580 million of the $1 billion 2016 cost target. The cost reductions made the company to deliver a first half of 2016 EBITDA margin of 33%. There was strong delivery across all the product groups and functions. The cost culture is embedded across the entire organization and excludes the impact of favorable exchange rates and lower oil prices. On the other side,RIO has been giving the required six months’ notice to Bougainville Copper Limited for the termination of the Management Services Agreement. As a result, Bougainville Copper Limited would now be an independently managed Papua New Guinea Company.
 

Pre-tax operating cash cost improvements reduction (US$ billion) (Source: Company Reports)
 
Raising Production to offset falling prices:The group’s Pilbara production rose over 11% to 131.3 million tonnes in the first half of 2016, as compared to $118.6 million in the prior corresponding period. Solid rail performance coupled with no major weather events contributed to this outcome. Moreover, most of the inventories which were piled up at the mines during the infrastructure expansion phase, were exhausted by the end of 2015. The group’s efforts of operational improvements coupled with expansion of new mines at Pilbara would continue to drive the production going forward. RIO forecasts its Pilbara iron ore shipments to be over 330 million tonnes (100 per cent basis) in 2016, based on the weather conditions. But, with the delay in AutoHaul® means production as they reported in the first quarter, the group expects the Pilbara to be in the range of 330 and 340 million tonnes in 2017, subject to the productivity and capital expenditure plans.
 
Cash flow and strong balance sheet: RIO has been constantly making efforts to strengthen their balance sheet in order to position themselves against the iron ore price volatilities. Accordingly, the group generated a net cash from operating activities of $3.2 billion, as taxes paid and further cash cost improvements has partly offset the impact of lower prices and higher interest. RIO has achieved $0.6 billion of sustainable operating cash cost improvements (including exploration and evaluation savings) in the first half of 2016. Moreover, RIO is on track to meet full year target. The capital expenditure is of $1.3 billion, of which $0.7 billion was sustaining capex. RIO has generated free cash flow of $2.0 billion and has completed the $0.6 billion of divestments, with a further $0.2 billion being announced and expected to finish by the second half of 2016. Additionally, RIO has maintained a strong balance sheet with net debt of $12.9 billion and has a gearing ratio of 23%, in the lower half of the targeted range. RIO is targeting 20-30% gearing ratio range through the cycle.
 

Debt and net gearing ratio in US$ billion (Source: Company Reports)
 
Building growth projects:The Silvergrass iron ore development costs of $338 million is being approved by the board which would enable the group to maintain the Pilbara blend and lower unit costs. The development of the Oyu Tolgoi underground copper mine in Mongolia for $5.3 billion is announced in May 2016 in which the first tonnes are expected by 2020, with average production of 560 thousand tonnes between 2025 and 2030. The Amrun bauxite project in Queensland is on track and it is expected to increase exports by around 10 Mt/a while the first production is expected in the first half of 2019. On the other hand, Rio had completed sale of Mount Pleasant coal assets to MACH Energy Australia Pty Ltd.
 
Guidance for FY 16:The operating cash cost improvements (including exploration and evaluation savings) of $2 billion (pre-tax) is expected over 2016 and 2017, in line with the previous guidance. The capital expenditure is expected to be around $4.0 billion in 2016, around $5.0 billion in 2017 and around $5.5 billion in 2018. RIO’s each year includes around $2.0 billion of sustaining capex. Additionally, RIO is continuing to target 20 to 30 per cent gearing ratio through the cycle. The underlying effective tax rate is of approximately 27 to 30 per cent as expected in 2016. Moreover, the production guidance is unchanged from the Second Quarter Operations Review, except for mined copper which is now expected to be between 545 and 595 thousand tonnes in 2016, after the revision to Freeport’s guidance for Grasberg.
 
Dividend player: RIO paid 2015 final dividend of $1.9 billion in first half of 2016 and has declared 2016 interim dividend of 45 US cents per share, equivalent to $809 million, to be paid in the September 2016. Moreover, overall full year dividend will be not less than 110 US cents per share which is equivalent to $2 billion. The stock has a good dividend yield.
 
Stock Performance:The shares of RIO stock rose over 14.84% in the last three months (as of September 27, 2016) and we believe the momentum to continue in the coming months. Given the estimated recovery in the iron ore prices, the group’s operating cash flow would further strengthen which would further support the stock. On another note, Rio Tinto plc has notified London Stock Exchange of PDMR/KMP interests in securities of Rio Tinto plc in compliance with EU market Abuse Regime Article 19(3), and the same has been voluntarily notified to ASX in terms of the material dealings in RIO’s securities. We maintain a “Buy” recommendation on the stock at the current price of $50.00
 

RIO Daily Chart (Source: Thomson Reuters)

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