Rio Tinto vs. Vale: Who Has The Edge?

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RIO: Rio Tinto logo
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Rio Tinto

Rio Tinto (NYSE: RIO) and Vale (NYSE: VALE) are the two largest iron ore miners, with their operations diversified in other minerals and metals as well. Trefis details How Revenues And Key Operating Metrics For Rio Tinto And Vale Have Changed in an interactive dashboard, and highlights why Rio Tinto is having higher margins despite its revenue growth being consistently lower than Vale. Although Trefis expects this trend to continue in 2019 as well, we believe that Vale is a much better and efficiently managed company, and this would be reflected in its projected higher profitability in 2020.

1) Overview

  • Vale is the world leader in iron ore and iron ore pellets production and has access to the world’s largest nickel reserves. Apart from iron ore and nickel, it also produces copper, coal, and other base metals. Vale also operates a large logistics network in Brazil which includes railroad, maritime terminals, and a port.
  • Rio Tinto has operations across six continents, but these are mainly concentrated in Australia and Canada. Although primarily focused on extraction of minerals, Rio Tinto also has significant operations in refining, particularly for refining bauxite and iron ore.

2) Rio and Vale: Current Revenue

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Rio Tinto reported $40.5 billion in total revenues in 2018, while Vale’s revenue was lower at $36.6 billion. Revenues (and % contribution) of divisions to the top line of these companies was: (Rio Tinto vs Vale)

  • Iron Ore & Pellet: $18.5 billion (45.6%) vs $27.0 billion (73.8%)
  • Other (Nickel, Aluminum, Copper, etc.): $22.0 billion (54.4%) vs $9.6 billion (26.2%)

3) Rio v/s Vale: Total Revenue and Revenue Growth Trend

  • Rio Tinto and Vale, both saw their total revenues increase in the recent years. However, Rio Tinto’s revenues have consistently been higher than Vale’s revenue base.
  • This was mainly due to better diversification of Rio’s revenue in areas other than iron ore – like aluminum, copper & diamonds, energy, etc.
  • Whereas, Vale’s revenues are largely concentrated by iron ore and pellet, with lesser diversification into other avenues such as nickel, copper, etc.
  • Rio’s total revenues have increased from $33.8 billion in 2016 to $40.5 billion in 2018, while Vale’s revenues increased from $27.5 billion to $36.6 billion during the same period.
  • Rio’s revenue base is likely to expand to $42.4 billion by 2020, compared to Vale’s $39 billion.
  • Rio Tinto’s revenue growth trend has largely moved in tandem with that of Vale.
  • However, despite Rio having a larger revenue base, Vale’s revenue growth has consistently been higher than Rio Tinto, mainly because of a lower base, while Rio’s revenue growth was also affected due to volatility in copper prices and sale of some of its operations.

Below we take a look at the Iron Ore division for both companies

3.1) Iron Ore & Pellet Revenue

  • Rio’s iron ore division has added $3.9 billion in revenues between 2016 and 2018, which is almost half compared to Vale’s $7.4 billion incremental revenue during the same period.
  • However, the trend is expected to reverse, with Rio’s iron ore revenue likely to increase by $3.4 billion in the next 2 years (by 2020), compared to $2.1 billion in Vale’s case.
  • This is likely to be driven by higher iron ore shipments for Rio, while Vale’s iron ore shipments are expected to remain flat.

3.1.a) Iron Ore Shipments

  • Rio Tinto’s iron ore shipments have remained lower compared to Vale, though both companies have seen steady growth in volume sales over recent years.
  • Rio’s iron ore shipments are likely to see a cumulative increase of 3 million tons in the next 2 years (with a drop in 2019 led by Tropical Cyclone Veronica, and a fire at Cape Lambert A port).
  • In contrast, Vale’s iron ore shipments are not expected to see any increase from its current level, with it actually dropping in 2019 due to a major dam burst in January 2019, which led to the company cutting down on production.

3.1.b) Price Realization

  • Rio and Vale have seen their iron ore price realization move in tandem, though Vale’s price realization has been consistently higher than Rio’s, with the trend expected to continue.
  • Better price realization is driven by much better iron ore quality at Vale’s mines.
  • With China placing restrictions on ore with iron content of less than 62%, the higher iron ore content in Vale’s ores has helped it command a premium for its production.
  • On the contrary, with most of Rio’s iron ore having Fe content ranging from 55% to 62% (with a very minor portion with 65% Fe), its price has been lower than Vale’s price realization.

4) Rio vs. Vale: Operating Profit Margins

  • Though both companies saw their operating income margins increase in recent years due to rising revenue led by higher output and prices, Rio’s margins surpassed Vale’s in 2017 and 2018, mainly due to gain on sale of coal assets and interest in Grasberg, recorded by Rio in 2017 and 2018.
  • Margin for both companies is expected to drop in 2019, but Vale could see a sharper drop with its one-time expenses related to the Brazilian dam accident.
  • However, Vale will likely outperform Rio in 2020, with all its major one-time expenses already incurred and no major asset sale benefit for Rio.
  • Margins for both companies in 2020 will likely stay below the levels seen in 2017 and 2018, as iron ore prices are projected to decline with slowing demand from China.

To see how net income margins have trended for Rio Tinto and Vale and what is the outlook, view our dashboard analysis

5) Conclusion

  • Although Rio Tinto has higher revenues and is more diversified, its revenue growth rate is lower than Vale.
  • Rio Tinto has had better operating and net margins in the last two years, mainly due to one-time gains from asset sales. Vale’s operations are much more efficient, which is evident from higher margins in years when there are no unusual/unexpected one-time events.
  • Vale’s reliance on iron ore is much higher than that of Rio Tinto (74% vs 46%), which provides Rio an advantage when iron ore prices decline, as better diversification helps it cover up revenues through copper, aluminum, energy, diamonds, etc. However, Vale is able to realize much more of an advantage during a boom phase because of its higher-grade ores.

 

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