Rio Tinto Group (RIO)

Rio Tinto Group is one of the largest mining corporations in the world. For that reason alone, since its shares are publicly traded, it’s worth taking a look at.

Everything with this miner began back in 1873 when a group of investors bought a mine complex from the Spanish government in Rio Tinto, in Huelva, Spain (hence the name of the company). Today, Rio is an Anglo-Australian corporation with operations all around the world.

Besides its mineral extraction business, the company also engages in the refinement of iron ore and bauxite, among other raw materials.

As the second-largest miner in the world, Rio has assets around the world; major assets include the Gove and Weipa bauxite mines in Australia, its 34% stake in the Oyu Tolgoi copper mine located in Mongolia, a 30% stake in the Escondida copper mine, 6 Canadian hydro-powered aluminum smelters, and its Pilbara iron ore operations.

Obviously, Rio is an interesting company for anyone to at least take a look at. It’s a very large company with an equally large market share. In this article, we will examine some of the forecasts provided by Wall Street and try to see how realistic they are after we check some fundamental aspects of the stock.

Let’s dive into it…

Stock Forecast for 2023

Based on 3 analyst firms covering RIO, the median price target for the stock in the next 12 months is $86 and suggests a 28.84% upside from the stock’s April 6, 2023 closing price of $66.75. The highest price target is $95 per share, while the lowest one is $67, which also suggests a 42.32% and 0.37%% upside, respectively, from April 6, 2023’s close.

However, based on the company’s operating results, are these price targets justified?

First of all, revenues have been more or less stable in the span of the last 10 years. However, 2021 was an unusually good year for the company as its revenue increased from about $44.6 billion in 2020 to $63.5 billion, breaking an almost flat 4-year period. However, sales shrank to $55.5 billion; still, the highest figure in a decade, except for results in 2021.

Net earnings benefited from this growth as they grew from $9.7 billion in 2020 to $21 billion in 2021. Of course, following the revenue trend, net income for 2022 was lower, at $12.4 billion. Consequently, EPS was $6.03 in 2020 and $13.03 in 2021. But in 2022, EPS was lower, at $7.67.

Operating cash flow behaved similarly, being up to $25.3 billion in 2021 from $15.8 billion in 2020 and then again lower ($16.1 billion) in 2022.

Continuing, margins in the last 12 months have been good. The gross margin was 38.34% and the net margin was 22.36%. For comparison, the sector median gross margin was 29.47% and the net margin was 7.59%.

Regarding the trailing 12-month period again, RIO’s return on equity was 24.45% while the sector median ROE was 11.69%. Similarly, the return on assets for RIO was 12.84% and the sector median ROA was 5.4%.

There’s no arguing that so far the company is efficient and has been profitable for a long time. Though there is not a definite trend of revenue growth over a long period, the recent increase in revenue and net income somewhat counterbalances this.

With respect to dividends, RIO’s high dividend yield (7.56% based on the TTM EPS figure) is a strength. However, we will need to examine if it is safe.

First, it’s a worrying sign that Rio’s TTM payout ratio is 114.48%, because the company may have to keep tapping into its cash balance. But this is not likely because Rio never had a problem increasing and cutting its dividend when necessary. It’s more likely that it will just cut its dividend further, as it did it on each of the last 2 payment dates.

The interesting thing is that as far as interest payments are concerned, the company is liquid enough. The dividend is simply too high right now for it to keep up with the payments. And without any trend regarding cash flow in sight, it’s unreasonable to expect Rio will not cut it further. For these reasons, the dividend could be at risk.

But if you’re not interested in the dividend much in the first place, you may want to at least know that Rio’s debt is low relative to its equity (D/E: 0.2). It also has a current ratio of 1.6 and a quick ratio of 1.1. Insolvency is currently not a problem for this company.

As for valuation, let’s compare it to its closest competitor and largest mining company in the world, BHP.

Rio’s TTM P/E ratio is 8.44 and BHP’s is 8.05, which is very close. The same goes for their EV/EBITDA ratios, with 5.1 for RIO and 4.86 for BHP. Where Rio seems undervalued is when it comes to its sales, with a P/S ratio of 1.87 (BHP has one of 2.42). The market seems to also be valuing RIO’s tangible book value lower, at 2.28 times its share price, than BHP’s, at 3.56 times.

RIO could be an option for those seeking mining industry exposure. The company appears to be fairly valued and has significant mining exposure due to its size. However, there are still risks to consider beyond its dividend.

Conclusion

In conclusion, RIO is a good vehicle to get exposure to the mining industry. Its operating results are strong and stable enough. Additionally, it’s very conservatively financed and its dividend yield is high right now.

However, there are some uncertainties surrounding Wall Street’s outlook on RIO, as well as its potential valuation and margin of safety.

We hope this article helped you get a clearer idea of where things stand right now with RIO. Make sure that you do your own due diligence before you make any decisions.

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