Rio Tinto, as other mining companies, has been suffering in the last 5-7 years the decrease in commodity pricing and they have been deleveraging to reduce costs and risks.
The best in this group is probably Rio Tinto, an 85B USD$ Australian miner focused in Iron Ore, aluminum and copper, with solid financial position (debt is only 0.6 x EBITDA), large free cash flow and shareholder friendly policy.
Rio Tinto has numerous competitive advantages:
- one of the cheapest producer of Iron Ore (around 14$/ton),
- Highest Product quality in the market
- Automated operations (driverless trucks and trains extract and bring minerals to the Australian port of Hedland)
- Few tier 1 mines with large reserves for the next coming year
This efficiency allowed Rio Tinto to generate plenty of free cash flow, enough to reduce debt by 2B$, 1B$ of share buyback and 2B$ dividend for the semester. Moreover, free cash flow could grow even further, thanks to:
- Iron Ore, Aluminum and Copper prices are recovering fast lately thanks to better economic growth around the world
- 5B $ additional cost cutting by 2020
- Large new projects coming live in the next years:
- Silvergrass, high margin Australian Iron Ore mine, adding 10mn tons and 500m$ cash flow
- Oyu Tolgoi, world largest Copper reserve in the world and next to China. More than 1B$ cash flow expected by 2020 and 4B$ expected revenue by 2025
- Amrun, large Bauxite mine (base for Aluminium) with 500m$ cash flow opportunity in 2019
As mentioned, Rio is in a very solid financial position, after they have decreased Net debt from 27B$ to 7.5B$ in the last 3 years. Rio could pay it back with few months of cash flow. I expect Rio to mantain Net debt close 5B$, dedicating the rest for shareholders.
As Top Executives has reduced debt to comfortable levels, they are focusing on repaying shareholders trust. This year only Rio Tinto has dedicated 4B $ to repurchase shares (4.7% of the total capitalization), 4.5$ USD in dividends (5.2% dividend yield), plus debt reduction.
Not only Free cash flow could reach 10-12Bn $ in the coming years (14% Free Cash Flow yield), but Rio Tinto is also planning to selling 2nd tier assets and distribute additional dividends.
Miners work in a delicate and competitive industry, where the most efficient and best quality companies will be the one surviving any bad cycle. Rio Tinto is one of them!
Rio Tinto is listed in USA under the ticket: NYSE:RIO