Rio Tinto

Rio Tinto is the 2^nd largest mining company by Capitalization, with large majority of its revenue coming from Iron Ore, while Copper and Aluminum are the other main source of profit.

Why should you be interested in this company?

Rio Tinto has been a clear winner in its industry in the last decade, when everybody struggled with commodities fluctuation. They were able to make leaner operations, find new mines, prepare them, while reducing their debt.

Below, the main advantages that I see in Rio Tinto today:

• Cost advantage
  • Rio Tinto is able to mine Iron ore at 14-15$ per ton (current spot price is 127$) with a good quality product (62% Fe)
• Proximity to large markets vs Brazilian competitors.
  • Being closer to the main steel producer has been an advantage in cost and time of its supply chain
• Large growth in demand expected from massive infrastructure programs from USA, Europe and India
  • Many governments to boost their economies has decided to launch massive infrastructure and renewables programs, that should boost copper and steel demand for the next 5 to 10 years
• No Debt
  • In the last 5 years, Debt position went from 9.5B$ Net Debt to a positive 3.3B$ in the last presentation in Aug 2021, giving the opportunity to be more generous with its shareholders
• New projects coming live soon
  • Rio Tinto has multiple large projects coming live in the next years that could bring additional revenue and profit (Gudai-Darri and Simandou mine for Iron Ore, Jadar mine in Serbia for Lithium, Oyu Tolgoi mine in Mongolia for Copper)
• High barriers of entry
  • Of course, each new project is always risky and not guaranteed but this is the same for other competitors, giving more certainty on current revenue stream

“The Fab 4”

1. Free Cash Flow yield higher than 10%
   1. Current Free Cash Flow should generate around 20-21B$ on a 110B$ capitalization (based on 1,6 B shares and 69$ share price)
2. Debt or Financial solidity
   1. As mentioned, Rio Tinto is Cash Positive
3. Strong and trusted management
   1. Historically Rio Tinto management has been prudent and focused on a diligent Debt reduction and Operations Improvement Plan
4. Margin of safety
   8. Many analysists support this point of view and are projecting 12$ and 8.6$ Dividend for 2021 and 2022 respectively. That would imply a minimum of 15% dividend on current prices, demonstrating a quite low evaluation.

Risks

As in every investment, there are some risks associated. Here the main ones:

• Its profit is dependent on commodities prices. Lower prices similar to 2016 should ultimately reduce benefit, but would also limit competition due to its cost advantage
• Political tension between China and Australia that should force Rio Tinto to find new buyers (China currently covers 58% of Rio’s revenue)
• Failure to materialize new projects like Oyu Tolgoi that has been suffering many years delay

Conclusion

Rio Tinto is a good bet against inflation and for its potential growth while enjoying a large dividend that could help you start new positions and diversify your portfolio.

During the last decades Rio Tinto demonstrated its ability to continue growing its business. 20 years ago, Rio was producing 2B$ EBITDA, while this year is expected to reach 40B$ EBITDA. 20x in 20 years.

If Rio Tinto reinstates its buyback program, I won’t be surprised to see 30-40$ dividend in 2030, especially if inflation materializes.