Friday 9 December 2016

Rio Tinto is proof that the strong thrive in industry

Share watch with John Lynch

Published 28/11/2016 | 02:30

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Reading and memorising the poems and recitations of the great Canadian poet Robert Service (with his tales of strange things done on the midnight sun) gave many of an earlier generation an abiding fascination for the mining industry.

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Service wrote: "This is the law of the Yukon that only the strong shall thrive; that surely the weak shall perish and only the fit survive."

While this grim reality seldom made it into the management texts, both miners and the mining companies on the ground will have found it hard to quarrel with the sentiments.

Nevertheless, there are some great mining operations that have survived centuries of vicissitudes and today's company, the Anglo-Australian Rio Tinto is one of them. It is one of the great multinationals, focused on the sourcing, mining, processing and selling mineral resources, from aluminium to gold to iron ore worldwide. Dual listed, it is quoted in both London and Australia with a workforce of 55,000 in 40 countries and operations on six continents.

As the name suggests, it had its origins in Spain and only exited in the 1950s when the company fell foul of General Franco. Through decades of mergers it is now the second-largest mining operator in the world and could get a boost from the new American regime of Donald Trump.

Rio is divided in to four product groups - aluminium, copper/coal, diamonds/minerals and iron ore. Last year the industry had a bad year. Sales and profits declined in every division.

The company is a global leader in the aluminium industry. This includes Bauxite (natural ore for aluminium) mines, large scale alumina refineries and aluminium smelters, mainly in Canada. Revenue last year was down 16pc to $10bn (€9.4bn) and earnings before tax at $2.7bn was down a similar amount.

The company's copper and coal operations were restructured last year and integrated into a single division. It has four copper mines, one each in the US, Chile, Indonesia and a new large mine in Mongolia. Its coal operations are located mainly in Australia. Copper and coal sales declined 25pc to $7.7bn with a similar drop in profits to $2bn. However, there has been significant progress in recent months.

Copper prices have jumped by 20pc, pushing it to its highest level in a year. Coking coal has soared by 200pc and thermal coal, used for power stations, gained 33pc in the last month.

Rio's smallest division is its diamond and mineral division. This includes the mining for diamonds, titanium, uranium and salt. Sales fell 17pc to $3.7bn as did profits to $830m. A key commodity for Rio is iron ore. It is the largest and most profitable division. Iron ore is important for the production of steel, widely used from construction to paperclips. Sales last year at $15bn were almost $9bn off the previous year and profits before tax at $7.9bn were down 50pc. Recent months has seen iron ore prices rise thanks to Chinese demand, and higher cost operators being forced out, and as a low-cost operator, Rio is smiling.

In the commodity bust, Rio's business has been 'challenging.' Sales in the last five years have plunged from $60bn to $37bn. Profits fell from $20bn to $4.5bn and operating margins were reduced. Like all miners Rio is paying down debt to combat the downturn in prices. It cut dividends, pared back capital expenditure and offloaded assets. There will be $1bn in savings this year and again in 2017.

Investors who bought the shares early this year at £15.50 are happy with the stock now at £31. However not all investors are smiling. In spite of the $25bn returned to shareholders over the last five years, Rio intends changing its progressive dividend policy. However the 'big picture' may be changing. Trump promises to throw lots of money at US infrastructure and build roads, railways and bridges, can only be music to the ears of giant commodity producer like Rio.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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