Rio Tinto Limited

RIO Details

Recent Updates: Rio Tinto Limited (ASX: RIO) is engaged in the mining, exploration, and production of minerals and metals. It operates segments of iron ore, aluminium, copper, diamonds, and energy and minerals.

Key Elements of the Oyu Tolgoi (OT) Project Agreement:

• Recently, RIO, Turquoise Hill Resources (TRQ), and the Malaysian Government have reset their partnership and arrived on an agreement to progress on the Oyu Tolgoi (OT) project in Mongolia.
• The first sustainable production from the OT project is expected in 1HFY23 and the estimated project cost is ~$6.925 billion. TRQ and RIO have changed the Heads of Agreement inked in April 2021 to ensure appropriate financing for OT. A reforecast of time and cost will be conducted in 1HFY22.
• As per the modified agreement, RIO will provide a co-lending project finance facility of up to ~$750 million to OT after the completion of a pre-defined milestone.

Shares to KMP: On 24 January 2022, RIO issued ~74,546 shares to Sinead Kaufman and Ivan Vella (two key management personnel (KMP) upon the expiry or exercise of options under an employee incentive scheme. 

Q4FY21 (31 December 2021) & FY21 Results:

• Project Acquisition: In December 2021, RIO signed a binding agreement to purchase the Rincon Mining lithium project in Argentina from Rincon Mining for ~$825 million. This acquisition is expected to strengthen RIO’s portfolio for the global energy transition towards decarbonisation and increase the supply of battery-grade lithium carbonate.
• Lower Production: The Pilbara iron ore production and shipments decreased by ~2% QoQ and ~5% QoQ to ~84.1 mn tonnes, respectively, in Q4FY21.
• Higher Exploration Expense: The evaluation and exploration expense rose ~16% YoY to ~US$726 million in FY21 from ~US$101 million due to the ramp-up of activities in Europe, Australia, and Western Africa.
• Commodity Prices and Demand Outlook: Though the copper prices have been reported to retreat from the record levels, however, have been reasonably supportive. The lithium carbonate and aluminium prices have continued to remain strong. The demand for battery materials is well supported by the rise in global sales of electric vehicles growth and the adoption of electric vehicles by all major automotive markets. The average realised price across key commodities of iron ore, aluminium, copper, IOC pellets was reported to increase from FY20 to FY21.
• Successor Announced: Recently, the Board of RIO declared that Dominic Barton will join as the Chair of the company with effect from 4 April 2022. Simon Thompson will step down from the role of Chair and Non-Executive Director on 5 May 2022.

Increase in Average Realised Prices of Commodities, FY21 Vs FY20; (Analysis by Kalkine Group)

Key Risks: The company faces changes in commodity prices, production, and demand. Climate conditions, COVID-19, tight labour market, and environmental hazards continue to pose risks.

Outlook:

• RIO has narrowed down the guidance for Pilbara shipments between ~320 - ~335 million tonnes relative to previously stated at the low end of ~325 - ~340 million tonnes for FY21 due to the completion delays (in the Robe Valley brownfield mine replacement project and the new greenfield mine at Gudai-Darri) and a tight labour market in WA (Western Australia).
• The company plans to announce the FY21 results on 23 February 2022.
• RIO has set 11 March 2022 as the record date and 21 April 2022 as the payment date for the final dividend of 2021.
• It plans to hold the FY22 AGM of Rio Tinto plc on 8 April 2022 and of Rio Tinto Limited on 5 May 2022.

Valuation Methodology: Price to Earnings per Share Multiple Based Relative Valuation (Illustrative)

Source: 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 of RIO gave a positive return of ~12.14% in the past month and a positive return of ~8.32% in the past three months. The stock has a 52-weeks’ low level of $87.280 and a high level of $137.330. The stock of RIO has a support level of ~$99.10 and a resistance level of ~$130.00. The stock has been valued using the P/E-multiple-based illustrative relative valuation method and arrived at a target price with a correction of a high-single-digit (% terms). The company might trade at a slight discount than its peers’ mean P/E multiple, considering the production impact across commodities in FY21, narrowed iron ore production guidance for FY22, and continued COVID-19 impact on labour and supply chain. For this purpose of valuation, a few peers like BHP Group Limited (ASX: BHP), South32 Limited (ASX: S32), Perenti Global Limited (ASX: PRN) have been considered. Considering the multi-commodity impact on the production of iron ore, bauxite, aluminium, mined copper in Q4FY21, decent returns in the past months, and indicative downside in valuation, and associated key business risks, we suggest investors book profit and give a ‘Sell’ rating on the stock at the closing price of $113.76, up by 4.09% as on 28 January 2022.

RIO Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

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