RIO Details

RIO Taking Actions for Strengthening Business and Improving Performance: Rio Tinto Limited (ASX: RIO) is a mining and metal company focused on the production of aluminium, copper, minerals, and iron ore. In an update provided on 20 October 2021, the company highlighted several actions that it is taking to strengthen the business and improve its performance. Key Highlights of the update are as follows:

• Decarbonising Business: In order to reduce its Scope 1 & 2 carbon emissions by 50% by 2030, RIO is accelerating its investment in R&D and development of technologies that will enable its customers to decarbonise.
• Doubling Growth Capex: RIO is targeting to double its growth capex to about $3 billion a year from 2023, so that it can meet additional demand created by the global drive to net zero emissions.
• Developing Sustainable Supply Chains: To develop a sustainable supply chain, the company is partnering with suppliers and is also supporting local and Indigenous supplier development.

Q3FY21 Result Highlights:

• Production Update: For Q3FY21, the company reported total Pilbara iron ore shipments (100% basis) of 83.4 million tonnes (100% basis), which was 2% higher than pcp. Further, the company reported Bauxite production of 14.0 million tonnes and Aluminium production of 0.8 million tonnes for Q3FY21.
• Decline in Mined Copper Production: Mined copper production for Q3FY21 stood at 125.2 thousand tonnes, down by 3% on pcp, mainly due to lower recoveries and throughput at Escondida as a result of the prolonged impact of COVID-19.
• Decarbonising Value Chain: Over the quarter, the company entered into three partnerships to progress its work to decarbonise its value chain.

Improved Top and Bottom line in H1FY21: For H1FY21, the company’s consolidated sales revenue stood at US$33.1 billion, up by 71% on pcp, driven by higher prices of iron ore, copper, and aluminium. NPAT for H1FY21 stood at US$12.3 billion, up 271% on pcp. As at 30 June 2021, the company had net cash of US$3.1 billion, compared to net debt of US$0.7 billion as at 31 December 2020.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Risks: The company continues to witness the prolonged impact of COVID-19 pandemic, which is impacting its production performance. The company is also exposed to the risks related to change in commodity supply and demand due to supply chain bottlenecks as well as material and energy shortages.

Outlook: With its robust balance sheet and world-class assets, the company seems well placed to deliver strong free cash flows through the cycle. For FY21, the company expects its overall capital expenditure to be around ~US$7.5 billion. For FY21, the company expects its Pilbara iron ore (shipments, 100% basis) to be in the range of 320 to 325 million tonnes. 

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock has been corrected by ~24.51% in the last three months and is trading lower than the average 52-week price level band of $90.035 and $137.330. The stock has been valued using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the risks associated with the fluctuations in commodity prices and COVID-19 uncertainties, etc. For the purpose of valuations, peers such as Fortescue Metals Group Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and OZ Minerals Ltd (ASX: OZL), etc have been considered.  Considering the company’s improved financial performance in H1FY21, strategic alliances with suppliers, modest outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $95.53, as on 25 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

RIO Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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