Shares in mining giant Rio Tinto (RIO) have performed well for me ever since I realised back in October that ‘investors should focus on China not cultural heritage’. Actually if truth is told, it is more than just China because demand for the iron ore, copper and aluminium exporter is centred on a broader changing world. Or as Rio Tinto put it on a chart in its second quarter numbers a few days ago, ‘we produce materials essentially for a low-carbon future’.
Of course there are purer plays for just this than iron ore, but having that and the rise and rise of current emerging market demand in the 2020s and beyond also really helps. And hence - helped by higher prices - first half profitability doubled year-on-year. But if you learn anything about the mining sector, it is to know that it really is all about the next few years. So whilst I could bang on about its free cash flow yield being closer to 10% than 5%, and that it has basically no debt today, there are many other issues to worry about. It is kind of interesting to see expenditure levels (whilst going up year-on-year over the last five years) are still not back at the levels seen in H1 2011-13. And that is because the period eight plus years ago was when Rio Tinto last worked out it needed to build new output. It always takes time in the mining sector and - amongst the biggest players - it is not easy to do.
So where is the future new supply excitement for Rio Tinto? Historically - particularly with iron ore - it has been Australia focused for the company, a point reiterated by its observation that its Pilbara operation in the country is expected to reach full capacity in 2023. From a core supply basis, good to see such progress for the 2020s given (at least) very firm demand from China and India, which have both worked out that supply from Australia is typically more attractive than from other key producers e.g. in Brazil. Talking about China specifically though makes me think about Mongolia and Rio Tinto’s continued growth efforts at the Oye Tolgoi copper and gold mine. There have been plenty of discussions here but - as Rio Tinto put it - it is ‘one of the largest block cave mines’. Politics and related have taken many years but are getting there. Certainly its no shock for it to be able to say that by 2030 it is expected to be the fourth largest copper mine in the world, because the focus for today or tomorrow is much more on iron ore for the Rio Tinto share price. For the start of initial progress and profits have a look in 2023. And then there is Serbia. Even though the Jabar mine is small versus the interests in (especially) Australia and Mongolia, it is correctly excited about the new agreement there given the 2020s/2030s potential of lithium. It is not really something I have ever been that excited about, but the first saleable production expected in 2026 has given it a number three new rating on Rio Tinto’s excitable new products list.
I could ramble on further. But if I go back to the numbers (even factoring in expected investment levels in both existing and new mines over the next few years), forward valuation is still at around a x6s EV:EBIT multiple with a high single digit free cash flow yield (even factoring in quite high capex levels). This still gives a fair valuation today nicely above a £70 share price, making the stock at a c.£60 share price today a BUY for me. And then there is the 5%+ dividend yield too. In short, still not a bad play to hide for FTSE 100 investors. Naturally there is a big ESG play from the company ongoing too!
Filed under: Rio Tinto, [email protected] Capital, Alessandro Zamboni, Block Energy, Verditek, Playtech
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