Rio Tinto plc (RIO, Financial) is a mining company which is involved in finding and processing mineral resources. It is involved in the mining and production of aluminium products including bauxite, alumina and aluminium; copper, gold, silver, and molybdenum; diamonds, borates, salt, and titanium dioxide feed stocks, as well as high purity iron, metal powders, zircon, and rutile; thermal and coking coal, and uranium; and iron ore.
The company presence is global with operations in China, Japan, and other Asian countries in addition to the United States, the United Kingdom, Europe, Canada and Australia. Since its origin in 1873, the company has come a long way and now has a market cap of $92 billion. The company’s stock has been punished due to recent economic uncertainties in spite of strong third quarter results. In this article, I will discuss how its operation in Australia and sustainable logistic will create value.
Financials
The company has delivered strong third quarter production of iron ore and solid performance in the copper and aluminium sector. Though the company’s revenue has increased by only 0.45% over the past year, net income has increased by 221%.
This suggests solid operational efficiency and successful cost cutting measures of the company. If we compare the company’s profitability against the industry average, Rio’s gross and pre-tax margin is decent with net profit margin exceeding far above the industry average’s 2.4.
The company’s financial health also looks good with Debt/Equity ratio, current ratio and interest coverage ratio better than the industry average. This suggests that Rio Tinto is well positioned to meet both its short term debt with adequate liquidity available. This also means that Rio Tinto is well positioned to grow strongly when global economic growth picks up.
Australian Mining: Long Term Growth
Australian resource sector provides strong contribution to the country’s economy. The sector accounts for 18% of the gross value added in Australia and 10% of total employment including direct and indirect jobs.
Moreover, the Australian government has abolished the mining and carbon taxes along with a streamlined project approval process. Free Trade Agreements and unwinding of red tape further signifies the support of the government for the resource sector.
I believe that an open national conversation and stronger support from the government will help Australia to be the best supplier of commodities in the world and also an attractive investment destination.
The company has over the years grown its operation in Australia with a constant innovation in its operation and technology. A trial of automated trucks in 2007, “à Pit” at Pilbara was the introduction of the company’s Autonomous Haulage System. The system was aimed to provide performance and value along with a better safety performance in operations.
Though it was a complex challenge for the company, Rio has continuously been working on it and today has the world’s largest autonomous haulage fleet operating in three mine sites. The fleet is operating in full production mode and has covered more than 3,900,000 km hauling materials.
In my opinion, an increasing support from the Australian government and improving technology will provide significant upside to Rio Tinto’s growth.
Logistics Will Create Value
Rio Tinto’s iron ore business has an extensive supply chain management with a leading innovation and technology. This has helped the company to continue to meet delivery projects and create better customer relations.
An example of the company’s technology and innovation in supply chain is its operation in Pilbara mines. At Pilbara, Rio owns 15 mines which are well supported by the presence of 1,600 kms of rail and 4 ports with 11 berths.
This integration demands end to end visibility of the entire value chain by rapidly responding to any downside issues. The company’s real time equipment data has and will continue to provide improved asset management and optimised maintenance.
Autonomous Haulage System as discussed above has led to about 14% increase in productivity. In addition to AHS, AutoHaul trucks have also enhanced the capacity leading to lesser number of trains. I believe the company’s effort in improving its supply chain with continuous innovation will help Rio in achieving greater operational efficiency.
In terms of valuation, Rio Tinto plc is currently trading at 2015 EV/EBITDA of 6 against Vale SA (VALE, Financial) and sector average of 7. The current dip in stock prices provides a good opportunity to hold a commodity leader which is trading at valuations below its peers.
