Rio Tinto: Could be another div surprise

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
20 January 2020, 3:50 PM
Sectors Covered:
Mining, Energy

  • Reporting a solid Q4 for its flagship iron ore operations, we see Rio as having notable potential for announcing a special dividend at its February result.
  • With minimal capex and significant cash flow generation from high iron ore prices, Rio enters this results season with significant ammunition to reward shareholders.
  • In 2020 we forecast iron ore prices to decrease over the year but for Rio’s earnings to remain healthy.
  • We maintain our Hold rating on Rio (Login to view the full detailed report and target price).

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Strong Q4 as expected 

Rio reported a solid fourth quarter operational performance from its flagship Pilbara iron ore operations, largely as expected.

Rio reported iron ore shipments (100% basis) of 86.8mt (vs Morgans 86.0mt) for total 2019 shipped volumes of 327.5mt. This was enough to see Rio come in at the high end of full-year guidance of 320-330mt.

Rio also flagged a jump in 2020 iron ore volumes with guidance of 330-343mt.

Rio’s Q4 iron ore performance was a prime focus area for us given high prices have seen iron ore’s share of group EBITDA surge over the last two years to ~82% (from 65% in 2018), although we do not count on iron ore prices remaining at current levels, with global supply recovering and China’s steel industry being mature (ex-stimulus).

In either case, Rio’s strong iron ore competitiveness leaves it well positioned. 

Dividend jump potential 

This time last year we, and much of the market, were positively surprised by a large final cash dividend from Rio.

With solid cash flow, the big miner elected to flex its dividend payout ratio to 107% of earnings.

Twelve months later we are faced with an even stronger earnings performance, and similar balance sheet strength, highlighting the large potential for Rio to once again lift its payout ratio for its final dividend (Rio has typically favoured second half pay outs given it has a better fix on its annual performance).

Even keeping our assumed payout ratio at an average 77% in 2019 (US$2.93 per share) would put Rio on an estimated dividend yield of ~6.9% fully franked.

Everything else in Q4

Besides iron ore, Rio’s Q4 mined copper performance fell short of our estimate at 138.7kt (vs Morgans 158.2kt) with grades from the Kennecott operation remaining volatile as the mine transitions from the east to the south wall.

Escondida meanwhile did post another strong quarter as we had hoped at 92.3kt (vs Morgans 90.4kt).

Rio’s ali division meanwhile posted a good performance with bauxite 15.1mt (vs Morgans 11.6mt), alumina 2,032kt (vs Morgans 2,015kt) and aluminium 783kt (vs Morgans 822kt).

Titanium dioxide output was 11% lower in Q4 on hampered operations at Richards Bay on local instability.

Robust fundamentals 

While Rio is trading just ahead of our target price, on a TSR basis, it is hard to find other global mining companies at any point in the cycle that have had better earnings, balance sheet and dividend profiles than the big miner currently has.

With a target price of A$95.89 (was A$96.38) we confidently maintain our Hold rating.

The key risk to our Hold call is primarily related to global growth (macro drivers for metal prices), with a secondary risk the geological location of some operations in higher risk regions.

More information

Morgans clients can login to view our detailed report for Rio Tinto. 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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