Rio Tinto: Serious effort to get green
About the author:
- 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:
- Credit availability (already
occurring)
- 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
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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.