Company Overview:  Rio Tinto Limited (ASX: RIO) is a mining and metals company focused on the production of aluminium, copper, minerals and iron ore. The Company operates through four segments: Iron Ore, Aluminum, Copper & Diamonds, Energy & Minerals. The Iron Ore segment activity includes Iron ore mining and salt and gypsum production in Western Australia. The Aluminum segment activity includes Bauxite mining, alumina refining, and aluminum smelting.

RIO Details

Improved Financial Results in H1FY21: On 28 July 2021, Rio Tinto Limited (ASX: RIO) released its financial results for the half-year ended 30 June 2021. Key highlights of the results are as follows:

• Rise in Revenue: The consolidated sales revenue for H1FY21 stood at US$33.1 billion, up by 71% on the previous corresponding period (pcp), supported by higher prices of iron ore, copper and aluminium.
• Increase in Operating Cashflow: As a result of higher prices, the company’s net operating cashflow grew by 143% YoY to US$13.7 billion in H1FY21.
• Rise in Net Earnings: Net Earnings for H1FY21 stood at US$12.3 billion, up 271% on pcp.
• Interim Dividend Declared: For H1FY21, the company has declared an interim ordinary dividend of 376 US cents per share, and a special dividend of 185 US cents per share.
• Improved Net Cash Position: As at 30 June 2021, the company had net cash of US$3.1 billion, compared to net debt of US$0.7 billion as at 31 December 2020.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: For H1FY21, RIO reported EBITDA margin of 59.8%, up from 46.6% in H1FY20. Net margin for H1FY21 stood at 39.5%, up from 17.8% in H1FY20. Current ratio for H1FY21 stood at 2.13x, up from 1.61x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations.

Liquidity Profile and Profitability Metrics (Source: Analysis By kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 38.04% of the total shareholding, while the top four constitute the maximum holding. Capital Research Global Investors and The Vanguard Group, Inc. are holding a maximum stake in the company at 21.73% and 6.09%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Latest Developments:

• CGC Became Substantial Holder of RIO: Recently, The Capital Group Companies, Inc. (CGC), became a substantial shareholder of the company with 5.01% voting power. CGC now holds 81,054,256 ordinary shares of the company.
• Resumes Operations at Richards Bay Minerals: On 24 August 2021, RIO informed that it has started the process of restarting operations at Richards Bay Minerals (RBM) in South Africa. The company is now focused on ramping up the operations.

Entry into Battery Minerals: RIO has committed US$2.4 billion funding to Jadar lithium-borates project, which is one of the world’s largest greenfield lithium projects. The company expects first saleable production from the project in 2026 at a time of strong market fundamentals with lithium demand forecast to grow 25-35% per year over the next decade.

Key Risk:

• COVID-19 Uncertainties: The interstate and international border restrictions caused by the COVID-19 pandemic has impacted the availability and movement of people, most notably in Australia, Canada and Mongolia.
• Fluctuations in Commodity Prices: The company’s financial results are exposed to the risks associated with the fluctuations in the prices of commodities, most notably iron ore, copper, and aluminium.
• Foreign Currency Risk: Since the company’s operations are located in different countries, it exposes it to foreign currency risk.

Outlook: RIO continues to make progress on its four priorities, identifying opportunities for operational improvement, advancing its ESG agenda, taking important investment decisions and stepping up its external engagement. Looking ahead, the company is focused on developing projects that could deliver additional supply of the commodities that are high in demand. From 2029 onwards, the company’s Jadar lithium-borates project is expected to produce ~58,000 tonnes of battery grade lithium carbonate, 160,000 tonnes of boric acid (B2O3 units) and 255,000 tonnes of sodium sulphate annually.

In 2021, 2022 and 2023, the company expects its annual capital expenditure to be around US$7.5 billion. Pilbara iron ore production is expected to be around 325 to 340 Mt in FY21 with unit cash costs per wet metric tonne of US$18.0-18.5/t.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock has corrected by ~15.12% in the last three months and is trading lower than the average 52-week price level band of $90.035 and $137.330, offering a decent opportunity for accumulation. The stock has been using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the risks associated with the fluctuations in commodity prices and COVID-19 uncertainties. For the purpose of valuations, peers such as Fortescue Metals Group Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and OZ Minerals Ltd (ASX: OZL) have been considered. Considering the company’s improved financial results in H1FY21, robust balance sheet, modest outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $104.63, down by ~1.904% as on 15 September 2021.

RIO Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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