Stocks in Focus: Rio Tinto


06-03-2019

This week Girish Ramrous of NW Brown looks at Rio Tinto, the Anglo-Australian mining company, which recently reported full year results for 2018.

The company beat estimated underlying revenue by 4 percent, reported in-line gross profit and ended the year with a net positive cash balance of $0.3bn, beating consensus figures of $1.8bn net debt. A decent set of results for the group although the share price has largely remained flat; implying that much of the news was expected and factored into the share price.

Management also announced record cash returns to shareholders representing almost 14% of its $106bn current market capitalisation. These returns comprise of a $5.3bn ordinary dividend, $4.0bn special dividend and $4.2bn in share buy-backs. This news comes despite volatile commodity prices and a challenging macro-economic environment, with trade wars and government policy affecting consumption of basic resources. It can be difficult to see where future growth will come from in an established sector, however the board, acknowledging the cyclical nature of the industry, has stated it will return excess cash to shareholders. This policy enables management to invest in the company to drive future returns whilst maintaining a sensible capital structure.

China has been a major importer of iron ore since the beginning of this century, however selected data indicates a slowdown in demand as the government promotes cleaner industry. Rio Tinto would be exposed to any such slowdown as it derives approximately 50% of its revenues from iron ore. However, this risk is cushioned by the fact that the company owns so-called “tier one” assets that enable cheaper extraction compared to rivals. As a result, it enjoys industry-leading margins and is less financially sensitive to lower prices.

Commodity markets remain volatile and it is always possible that prices could drift lower, in which case it makes sense for investors to look for efficient businesses that do not have stretched balance sheets.

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