Rio Tinto - 2021 record results & loves dividends. Chris Bailey writes...

Postcard From Montana As Gold Blasts Higher and Putin Blasts Ukraine. Nigel Somerville writes HERE

Earlier this month HERE, I observed that the ‘Methodist Church threatens to pull stake from Rio Tinto (RIO) over damning sexual harassment report’. I am not sure if its investment committee listened to the mining sector giant’s results conference call but - if it did - it will be pleased with the huge amounts of ESG mentions in the first few minutes of the call. Most investors though will be more excited by the news of ‘record financial results and total dividend of 1,040 US cents per share for 2021, a 79% payout’, equivalent to over a 10% dividend yield. Whilst some of this was a special dividend reflecting remarkable metals sector prices during 2021, how should investors feel now about the FTSE-100 giant with a market cap of just shy of £94 billion?

One last monumental helping at the pigsty trough as Clem Chambers quits ADVFN. Read from Tom Winnifrith HERE

The easy news about Rio Tinto concerned its 72% year-on-year rise in underlying earnings per share, its 71% year-on-year rise in ordinary dividend per share, its 166% year-on-year rise in special dividend per share and its move from a small net debt to a small net cash position. Such is life when metals prices are strong. Frankly more impressive to me was its achievement of a third successive year of zero fatalities. And even though there was also plenty of mentions of ‘evolving our culture’ and ‘ambitious emissions targets’, what really struck me was the perception by its CEO that it does not make sense to do big mining sector M&A deals today – given he ‘does not know about the commodity cycle’, it is far smarter to focus on organic growth potential. You bet! The mining sector always has its ups and downs and certainly naturally interpreting high (low) multiples as indicating an expensive (cheap) share is absolutely incorrect. And whilst it certainly does matter if you have an optimistic or pessimistic view about global growth over the rest of the 2020s, what also matters is the combination of growing emerging market homes, bridges, cars, planes, bicycles, household appliances (and much more) demand for iron ore (and hence steel) and aluminium, plus green-focused higher demand for copper, lithium (and many other metals) all around the world. That is why it makes sense for the average investor to have some exposure to the sector. However whether a stock is cheap or not in the sector does depend on how the business is evolving. So it is good to see here exposure and progress in all those metals.

Versarien – auditors resign forcing change of year end. A big red flag says The Sheriff of AIM HERE

Iron ore remains the most important by far but progress here peaked in the middle of the year, whilst the aluminium and copper progress has continued into 2022. Geographically, Australia has always been absolutely critical for Rio Tinto and - if you factor in ESG matters - it is no surprise to hear the company observe about agreement with ‘Aboriginal corporation on a new co-designed management plan to ensure the protection of significant social and cultural heritage values as part of our proposed development of the Western Range iron ore project in the Pilbara region of Western Australia’, early in the results. It is going to have to keep on spending to develop here, but it makes sense in order to stay competitive against Australian peers. The other key area is Greater China. In the last couple of weeks the Chinese government has got more grumpy about iron ore supply and prices, and there has been talk that Rio Tinto spoke with the Chinese government about all this. The company has chosen not to comment on this beyond the observation that it is ‘always worked constructively with our customers’, but ultimately Rio Tinto is more price taker than price maker here. Fortunately, Australia is a relatively cheap iron ore producer compared to Brazil, India or elsewhere.

Eurasia Mining – no impact from sanctions claim already looks lame, shares tank but still a massive short says Tom Winnifrith HERE

Elsewhere Rio Tinto’s progress in Mongolia continues to improve after the recent ‘wide agreement’ with the country’s government, with ‘underground operations are now under way at the Oyu Tolgoi copper/gold project’. This is a nice 2020s (and beyond) exposure which will help build the company’s diversification. Otherwise it is still trying to develop the Simandou iron ore project in Guinea and ‘engage with key stakeholders in-country including the Government of Guinea’. If it can progress this, it will be another geographic positive. Elsewhere - re lithium - Jadar in Serbia remains desperately political but a good deal for both and the opportunity to develop the Rincon lithium project in Argentina sounds far from boring. Rio Tinto believes that lithium demand will rise by 10 times over the next decade. We shall see about that, but at least it is trying to develop it rather than spend billions on something that is already finished.

Read HERE: Victorian Plumbing – having only listed in June, warns on trading AGAIN!...

It had to admit that it is tough to be an aggressively growing mining company given its sheer size but I think it has a sensible range of exposures and I reckon this year (even with any assumptions of the Chinese wanting lower iron ore prices, let alone any further global economic angst), I still see the stock as a clearly sub x8 EV/EBIT / and 10%+ free cash flow generating company. You will likely not get a full dividend in FY22 akin to what the FY21 numbers have signed up for but - from a total return perspective - it is still one of my favourite FTSE-100 names and I see scope for a 10-20% total return by the end of this year. On that basis it remains a strong hold / buy, and I think it is smart about not looking for big M&A angles as firm cycle deals are rarely smart.

Market musings today and what is happening at Rolls-Royce? Read more from Chris Bailey HERE

Filed under: Rio Tinto, gold, Clem Chambers, Versarien, Eurasia, Victorian Plumbing, Rolls-Royce

2022-02-24 13:15:41

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