Rio Tinto: Serious effort to get green

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
27 February 2020, 6:12 PM
Sectors Covered:
Mining, Energy

Big effort to reduce carbon intensity

Along with the full year result RIO also revealed the added measures and robust approach it is undertaking to reduce its carbon intensity.

In addition to existing spend in areas such as renewable power at Escondida, RIO announced plans to spend an additional US$1.0bn on climate related expenditure.

Unsurprisingly, RIO’s Pacific Aluminium assets stick out amongst its portfolio as lowly economic and highly carbon intensive.

Divestment remains an obvious possibility, while RIO also outlined that it was working with local governments to improve its access to more affordable energy and/or tariff relief.

Virus impact to be followed by heavy stimulus

A similar base case to its global resource peers, at this stage RIO assumes a Q1 impact to demand with the pace of recovery likely to be determined by the pace of normalisation in logistics and transportation in China.

While short-term supply chain risks are material, RIO expects sizeable stimulus from China in the form of:

  1. Credit availability (already occurring)
  2. Targeted stimulus on consumption/infrastructure

Given the current conditions risks to iron ore remain, especially with high steel inventories, but RIO CEO JS observed that its iron ore order book remains full with no visible build up in iron ore stockpiles.

If the virus is contained, these conditions could see pent up consumption and targeted stimulus buoy commodity demand over the remainder of 2020.

Shoots the lights out

RIO reported a solid full year result, roughly in line with consensus and our expectations, with its major segments performing largely as expected.

This saw RIO achieve underlying NPAT of US$10,373m (vs Morgans US$10,681m) +18% pcp, underlying EBITDA of US$21,197m (vs Morgans US$21,230m) and gross revenue of US$45,367m (vs Morgans US$44,976m).

Profitability remained strong with group EBITDA margin of 47% and decade-high ROCE of 24%.

With 70% cash flow conversion RIO generated FCF of US$9,158m (+31% pcp), with ND/EBITDA of just 0.17x (net debt US$3,651m).

Robust fundamentals volatility an opportunity

Strong earnings and balance sheet, and a clear interest in considering layering more growth into its business.

In terms of new growth, RIO is focused on new opportunities in lithium, copper, high-purity nickel and PGM metals (outside South Africa), while from its existing portfolio we monitor progress at Koodaideri Phase 1, Winu drilling, a new mine plan at Oyu Tolgoi underground (Q2) and ELYSIS (carbon-free aluminium pilot in JV with Alcoa).

We see RIO as having solid defendable fundamentals and as a result would see any notable volatility likely as a buying opportunity.

In the meantime we maintain our Hold rating with a revised price target (Morgans clients can login to view detailed reports and price targets).

Key risk to our call is demand drivers.

More information

Morgans clients can login to view our detailed report and share price target for Rio Tinto (ASX:RIO). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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