Company overview - Rio Tinto Limited (Rio Tinto) is a mining company. The Company is focused on finding, mining and processing of mineral resources. Its segments include Iron Ore, Aluminum, Copper & Diamonds, Energy & 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 Iron Ore product group's operations are located in the Pilbara region of Western Australia. The Company's business includes bauxite mines, alumina refineries and a range of aluminum smelters. The Copper & Diamonds product group has managed operations in Australia, Canada, Mongolia and the United States, and non-managed operations in Chile and Indonesia. The Energy & Minerals has operations across six sectors: borates, coal, iron ore concentrate and pellets, salt, titanium dioxide and uranium.

RIO Details
 
Rio Tinto (ASX: RIO) shareholders approved the sale of a suite of Australian coal assets to China-backed Yancoal Australia (ASX: YAL) for $2.69 billion, ending a bidding war with commodities trader Glencore PLC (LON: GLEN). The sale was approved by 97% of shareholders of Rio Tinto's UK and Australian-listed shares. Funds from the sale had yet to be allocated within the company amid some calls by shareholders to use the money to boost dividends or buy back shares. Rio Tinto, which has dual primary stock listings in Australia and Britain, confirmed Yancoal as the preferred buyer on June 26 after Yancoal topped Glencore's offer of $2.675 billion. Yancoal is a 78% owned subsidiary of Yanzhou Coal Mining Co, which is 56% owned and controlled by a Chinese state-owned enterprise, Yankuang Group. Further, Rio Tinto has successfully completed its bond tender and redemption exercises announced on 22 May 2017 and has reduced gross debt by a further $2.5 billion. Notably, since the start of 2016, it has reduced the nominal value of outstanding bonds from approximately $21 billion to about $9.5 billion.


RIO’s World-class portfolio; (Source: Company reports)

Strong production in Q1FY17 despite challenging weather conditions:  The company has delivered Pilbara iron ore shipments of 76.7 million tons in the first quarter of 2017 (100 per cent basis). However, the ship loading was impacted by cyclone activity during the period, and sections of the rail network were affected by significant rainfall. Despite these disruptions, the shipments were in line with the first quarter of 2016 while guidance for 2017 remains at 330 to 340 million tons. The first quarter bauxite production reached 11.3 million tons and aluminum production reached 889 thousand tons which were both 2% higher than the corresponding quarter of 2016.n Mined copper production was declined 37% lower than the first quarter of 2016 due to a 43-day labor strike at Escondida. This strike, combined with the curtailment of production at Grasberg has led to revised 2017 mined copper guidance of 500 to 550 thousand tons. Titanium dioxide slag production increased by 35% compared to the first quarter of 2016, led by higher market demand, and 2017 production guidance has slightly increased to between 1.2 and 1.3 million tons.


Q1FY17 production volumes; (Source: Company reports)
 
Mined copper production in the first quarter of 2017 was 29% higher than the first quarter of 2016, benefiting from higher throughput. The higher mined production for the quarter resulted in improved refined copper production of 29.8 thousand tons, 15% higher than the first quarter of 2016. However, refined production was significantly lower than the previous quarter due to the processing of third party concentrate received in 2016, smelted and returned to customers in the first quarter of 2017. Kennecott tolls third party concentrate to optimize smelter utilization, with 68 thousand tons of concentrate received in the first quarter of 2017. Tolled copper concentrate is excluded from reported production figures, and notwithstanding the adverse weather conditions in the quarter, the south wall pushback continues to progress. Hard coking coal production in the quarter was 20% below the first quarter of 2016 due to the timing of the longwall changeover at Kestrel as well as processing rates at Hail Creek. The damage to rail lines caused by Cyclone Debbie in Queensland is expected to impact the timing, and potentially volume, of shipments from Hail Creek over the course of the year. Kestrel, whilst impacted, is not expected to experience significant sales disruption. First quarter semi-soft coking coal production was 18% lower than the same quarter of 2016, reflecting mine production sequencing at Hunter Valley Operations (HVO) and Mount Thorley Warkworth. Thermal coal production was 11% higher than the same quarter of 2016, as HVO benefited from higher productivity.


Energy & Minerals production; (Source: Company reports)

Debt reduction program:  Rio Tinto has successfully completed its bond tender and redemption exercises announced on 22 May 2017 and has reduced gross debt by a further $2.5 billion. Since the start of 2016 RIO has reduced the nominal value of outstanding bonds from approximately $21 billion to about $9.5 billion. It has issued a redemption notice for $1.72b of its 2019 and 2020 US dollar-denominated notes and has also started cash tender offers to purchase up to $781m of its five 2021, 2022 and 2025 US dollar-denominated notes as a part of the ongoing capital management plan. As announced on 8 February 2017, Rio Tinto plc and Rio Tinto Limited is conducting a $500 million share buy-back program to repurchase Rio Tinto plc's ordinary shares of 10 pence each, which commenced on 1 March 2017 and will end before 31 December 2017.


Strongest balance sheet in the sector; (Source: Company reports)

Improving steel market conditions: RIO has been supplying iron ore to the steel industry for over 50 years, and shipped over five billion tons of iron ore to customers worldwide. It has invested over $33 billion in the last decade to supply the world’s growing demand for iron ore and steel and standing as a reliable partner in the supply of iron ore products with stable and consistent quality. Rio Tinto has a long track record of supporting an open and transparent market, and it is a major provider of physically traded iron ore on spot markets to support price formation. Pilbara Blend fines is the most traded physical iron ore in the market and the company has consistently sold fixed price cargoes in the spot market to support open market price discovery. Steel demand recovery strengthened so far during 2017 with growth coming from China and other regions aided by healthy global demand combined with ongoing capacity cuts in China supported global prices and margins. Improved steel market conditions with higher capacity utilization, supporting steel mills margins.


World crude steel production; (Source: Company reports)

Focusing to enhance productivity: Rio Tinto Limited (ASX: RIO) expects to generate a $5 billion of additional free cash flow over the next five years from a productivity drive as part of its long-term strategy. RIO has planned to raise the productivity across its $50 billion portfolio of assets by focusing on operational excellence. Moreover, RIO is reshaping their portfolio and is going to sell the Lochaber smelter in Scotland for $410 million. The 2017 production is expected to generate operating cash flow of around $10 billion based on Q3 2016 average prices. The investment in exploration continues in 17 countries and eight commodities.


Focused on cash flows generation; (Source: Company reports)

FY16 impacted by lower commodity prices: During FY17, the company reported consolidated revenues of $33.8 billion, $1.0 billion lower than last year, primarily due to lower average commodity prices, and lower market premia for aluminium. However, EBITDA margin stood at 38% in 2016, compared with 34%in 2015 due to impact of the cash cost improvements. Underlying earnings stood at $5.1 billion, $0.6 billion higher than 2015, led by cash cost improvements of $1.2 billion (post-tax) more than offsetting the $0.5 billion (post-tax) impact of lower prices. Net earnings of $4.6 billion were $0.5 billion lower than underlying earnings reflecting net gains on disposals of businesses of $0.4 billion, non-cash exchange rate and derivative gains of $0.5 billion, offset by impairments of $0.2 billion, additional closure provisions for legacy operations of $0.3 billion, an onerous contract provision of $0.3 billion, a tax provision of $0.4 billion and restructuring costs of $0.2 billion.


FY16 Financial summary; (Source: Company reports)

Recommendation: Although, the stock has moved up by 32.5% over the last one year, given the robust balance sheet, improving production efficiencies and drive from supportive Chinese indicators, we give a “Buy” recommendation on the stock at the current price of $65.67.

 
RIO Daily chart; (Source: Thomson Reuters)
 

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