Stocks’ Details

Rio Tinto Limited (ASX: RIO)

Decent quarterly update: Up 1.1% on April 18, 2018, RIO has reported for a healthy operational performance across most commodities in the first quarter of 2018 with iron ore assets demonstrating increased productivity and bauxite and copper assets also depicting higher production levels. There was a 5% rise in Pilbara iron ore shipments of 80.3 million tonnes (100 per cent basis) in the first quarter while mined copper production of 139.3 thousand tonnes was 65 per cent higher than the first quarter of 2017 with recovery of output at Escondida following a labour union strike in the first half of last year. The group is focussing on strengthening its portfolio and slated about $5 billion of divestments in the quarter with work continuing on its mine-to-market productivity programme.
 

Quarterly Production (Source: Company Reports)
After the announcement made by the United States Treasury Department on 6 April 2018 regarding the implementation of the sanctions on various Russian individuals and companies, Rio reviewed the arrangements it has with impacted entities. The arrangements include Rusal’s (RIO’s partner) 20 per cent interest in Queensland Alumina Limited in Australia, Rusal’s associated supply and offtake arrangements, bauxite sales to Rusal’s refinery in Ireland and offtake contracts for alumina that are used at Rio Tinto’s smelters, mainly in France and in Iceland. Because of the imposition of these sanctions, Rio Tinto is in the process of declaring force majeure on certain contracts and is working with its customers to minimize any disruption in supplies. Rio Tinto is fully committed to complying with the US sanctions; and might update full year aluminium production guidance in view of these US sanctions against Russia.
 

Performance Overview (Source: Company Reports)
 
The Group has successfully used some of its surplus liquidity to further reduce the gross debt. Rio announced a price for its EUR cash tender under its plan to reduce the gross debt. The Tender offer price payable in connection with the Offer has been set at 1,046.74 per pound for 2020 Notes and 1,152.03 per pound for 2024 Notes. Rio Tinto is selling its entire 80% interest in the Kestrel underground coal mine in Qld, Australia (RIO’s last coal asset), for $2.25bn. The Group delivered a strong cash generation in 2017 through its ‘value over volume’ strategy - with underlying EBITDA of US$18.6 billion and an operating cash flow of US$13.9 billion. The EBITDA margin of 44 per cent was the best in a decade, because of stronger commodity prices and focussed effort on costs and productivity. However, operational and labour disruptions at some of its plants do raise some bit of a concern. The stock price is trading at higher levels (34.6 per cent up in the past one year). As of now, the stock looks a bit “Expensive” at the current market price of $ 78.960.
 

BHP Billiton Limited (ASX: BHP)

Maintaining production guidance: The Company announced a dividend reinvestment policy that will be operated for the FY2018 final dividend. By 2025, the Group’s vision is to be fully integrated and highly automated from resource to market. It focuses on improving safety by removing people from potential exposure to harmful situations. It is expected that the group will submit a project schedule for the South Flank for the Board approval in mid CY18, and if approved, Mining Area C complex in the Pilbara will become the world’s largest stand-alone iron ore mining and processing centre. With regards to Port Hedland, it is progressing well and is on track to achieve the target of 290Mtpa run rate by the end of FY19. By looking at the high demand of the high-grade ore, it is expected that the group will continue to be in a better position in the years to come. The group’s productivity guidance remains unchanged and US$2 billion of gains are expected to be delivered over the two years to the end of FY19. Full year unit cost guidance also remains unchanged for Petroleum, Copper, Iron Ore and Energy Coal. While the group’s copper equivalent volume growth of six per cent for the 2018 financial year, will be down from previous guidance of seven per cent due to lower volumes at Broadmeadow and Blackwater, the boost in the prices and commodity movement might still pave some benefits. This will find support from Spence growth project with new 95 ktpd concentrator expected to increase Spence’s payable copper in concentrate production by approximately 185 ktpa in the first 10 years of operation and extend the mining operations by more than 50 years.
 

Production performance (Source: Company Reports)
 
The Underlying EBIT for 1HFY18 was up by 15 per cent while and attributable profit was down 37 per cent in view of an exceptional loss, amounting to $11.2 billion and $2.0 billion. It was reported that net debt was down by US$0.9 billion from 30 June 2017 to US$15.4 billion as on 31 December 17 which reflected strong free cash flow generation. The Board determined an Interim Dividend of 55 cents per share which included an additional amount of 17 US cents per share (above the 50 per cent minimum pay out policy). The stock price was up by 25.1 per cent in the past one year and we recommend to “Hold” the stock at the current market price of $ 30.070, ahead of a production update expected to be released around April 19, 2018.

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