Can Rio Tinto Manage To Post Better Financial Performance In 2018 Following The Sale Of Its Coal Business?

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Rio Tinto

Rio Tinto (NYSE: RIO), a leading global mining player and one of the largest iron ore miners in the world, is set to announce its FY 2018 results on February 27, 2019, followed by a conference call with analysts. The company is expected to report net revenue of $40.7 billion in 2018, 1.6% higher than $40 billion in 2017. Higher revenue would most likely be driven by increased output and higher prices of iron ore and aluminum, offset by the loss of revenue from the sale of coal assets. Earnings for the year are expected to be $5.14 per share, compared to $4.90 per share in 2017. The higher EPS is likely to be the result of gains from the sale of low-margin coal assets, lower finance cost due to a bond buyback program, and higher capitalized interest, slightly offset by higher exploration and evaluation costs.

Our expectations for Rio Tinto’s FY 2018 results and projection for the company’s key drivers that impact its price estimate are available in our interactive dashboard – Would Rising Prices And Output Of Iron Ore Help Rio Tinto Offset Loss Of Revenue From Coal Segment In 2018? In addition, here is more Materials data.

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Key Factors Affecting Earnings

Growth in iron ore: As per Rio Tinto’s preliminary data report, iron ore shipments have increased by 3.2% to 281 Million tons in 2018, compared to 272 million tons in 2017. Higher volume was mainly driven by increased demand from emerging market economies. In order to minimize environmental degradation, the recent curtailments in China, which has banned low-grade iron ore (ores with iron content of less than 62%), is expected to boost the demand for high-grade ores of Rio Tinto. The policy decision led to a surge in global iron ore prices during the year. We expect the realized price per ton to increase to $70 in 2018 from $67 in 2017. Thus, increased shipments along with higher prices is likely to lead to iron ore revenue increasing by 7.7% to $19.7 billion in 2018.

Higher Aluminum revenue: We expect revenues from aluminum to increase to $11.9 billion in 2018, which would mark a rise of 8.2% over the previous year. 2018 saw aluminum supply remaining in deficit for most part of the year as lower margins led to economic curtailments in China and globally. This has led to higher aluminum prices during the year. However, higher prices would be partially offset by lower shipment volume due to a 3% decline in aluminum production, primarily driven by an ongoing lock-out at the non-managed Becancour smelter, which began in January 2018, and a power interruption at Dunkerque Aluminum in the first quarter.

Sale of coal business: Rio Tinto’s Energy and Minerals segment is expected to be a drag on the company’s revenue for 2018. Following the completion of the sale of Rio Tinto’s interests in Kestrel and Hail Creek in August 2018, production of coal attributable to Rio Tinto ceased completely. This move is expected to hit sales growth, with revenue from the segment expected to drop by over 25% in 2018.

Profitability: After a significant rise in margins during 2017, we expect net income margin to rise marginally to 22% in 2018, driven by gains from the sale of the coal business and a few aluminum assets, lower interest expense due to the bond buyback program of 2018, and higher capitalized interest, partially offset by higher mining, exploration, and evaluation costs.

Future Growth

Going forward as well, we expect iron ore and aluminum to drive revenue growth for Rio Tinto. In December 2018, Rio Tinto completed the sale of its aluminum smelter at Dunkerque, France, to Liberty House which would have an adverse effect on future volume. However, with alumina prices falling as the commodity’s global deficit nears an end, aluminum margins are expected to rise going forward (as alumina is an input for aluminum players). Also, though the exit from the coal business is expected to hit Rio’s revenue growth in the short term, this move is expected to help the company focus on its core operations. Additionally, lack of coal assets could make Rio more attractive to investors as capital moves away from fossil fuels. Rio sold its entire interest in the Grasberg mine (Indonesia) in December 2018. This is expected to lead to lower copper revenues for the company.

Rio Tinto has repurchased $5.4 billion of shares in 2018. According to the company’s management, the proceeds from its exit from non-core operations would be used to enhance core operations along with higher returns for shareholders. Thus, though we expect total revenues to decrease over the next two years on account of the sale of all of coal and part of copper and aluminum operations, we believe that focusing on core operations, coupled with the ongoing measures toward improving the balance sheet structure and enhancing shareholder returns, would drive the company’s value and stock price in 2019.

We have a price estimate of $59 per share for the company, which is slightly higher than its current market price.

 

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