Should you Take Profits on this Miner - Rio Tinto Ltd?

RIO Tinto Ltd

RIO Details

Enhanced shareholder returns: In the month of August 2017, RIO Tinto announced about returning a total cash of $3 billion to its shareholders with respect to 1H 17 through dividends and buy-backs. The group lately announced for an additional $2.5 billion to its ongoing share buy-back programme, returning the proceeds of the sale of Coal & Allied to its shareholders; and this brings the total of Rio Tinto share buy-backs announced during 2017 to $4 billion.

Reduction in debt: The group has been able to achieve its $2 billion cash cost reduction target ahead of schedule while reporting operating cash flow of $6.3 billion at its interim result. RIO’s net debt was reduced by $2.0 billion to $7.6 billion, with gross debt being slashed by $2.5 billion. 1H 17 underlying earnings were of the order of $3.9 billion (up 152%) while net earnings were $3.3 billion (up 93%) against the 1H 16 period. 

Earnings Result (Source: Company Reports)
 
Limited Growth Projects: RIO has been focussing on delivering value from its productivity programme and continues to strengthen the portfolio to build higher returns for the future. RIO has also sold its thermal coal business in Australia for $2.7 billion and is making progress on Oyu Tolgoi, Amrun and Silvergrass. Given the timing of the commodity cycle, RIO can consider asset disposal of its other non-core assets for improving returns profile, and provide excess cash to be distributed. For instance, the copper division has been an underperforming one. While returns might improve at Escondida with completion of the 3^rd concentrator, ramping up at Oyu Tolgoi is expected to happen after 2020 and Kennecott has been impacted by land slide and other challenges. Overall it appears that the group has relatively limited growth pipeline (Silvergrass iron ore development at Pilbara, Oyu Tolgoi copper mine and Amrun Bauxite project in Queensland). Recently, Rio completed the first fully autonomous rail journey at its iron ore operations in the Pilbara region as the company progresses towards full commissioning of the AutoHaul® project in late 2018.

Guidance:The group now expects cumulative free cash flow of $5.0 billion from 2017 to the end of 2021 from productivity improvements, while capital expenditure is expected to remain at around $5.0 billion in 2017 and around $5.5 billion in each of 2018 and 2019. In 2017, Rio Tinto’s share of production is expected to be 17 to 18 million tonnes of thermal coal, 3.3 to 3.9 million tonnes of semi-soft coking coal, 7.2 to 7.8 million tonnes of hard coking coal, 11.4 to 12.4 million tonnes of saleable production of iron ore pellets and concentrates, 1.2 to 1.3 million tonnes of titanium dioxide slag, 0.5 million tonnes of boric oxide equivalent and 6.5 to 7.5 million pounds of uranium.
 

Market Overview (Source: Company Report)
 
Looking at the commodity cycle, iron ore price pressure is building around the group’s performance owing to demand scenario at China that aims to curtail production through the winter months. Given that RIO stock has been up strongly off their low levels of last year (around 33% as at October 10, 2017), and the outlook for commodity is witnessing volatility lately, we believe it is time to reap the profits. We give a “Sell” recommendation on the stock at the current price of $68.77


RIO Daily Chart (Source: Thomson Reuters)
 
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