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Fat Prophets Hot Stock: Rio Tinto

Friday 27th January 2017

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Solid operational result

What’s new?

Rio Tinto has released its operational results for the full year to 31 December 2016. The company has turned in a very solid operational performance, although a little shy of guidance in its key iron ore business. Production records were again a feature for the year, including iron ore despite falling short of guidance. Furthermore, the company met 2016 guidance for a number of its other commodity offerings, with the coking coal types and bauxite being the standouts.

 

Apart from coking coal types and bauxite, the company reported better than guidance results for 2016 in alumina, copper refined, titanium and uranium. Copper mined joined iron ore in reporting a short of guidance performance, with aluminium, borates and thermal coal all in line. The performance of copper refined and the coking coal types were pleasing outcomes for the year.

Outlook

Rio Tinto will report its 2016 result on 8 February 2017. We expect underlying profit for 2016 to be in the range of US$4.7 billion to US$5.0 billion, with the dividend coming in between circa US$1.35 to US$1.41 per share, which is below the US$2.15 per share declared for 2015, with the year-on-year change due largely to management’s decision to base future dividends on a payout ratio of 40% to 60% of underlying profits.

In terms of CY17, management is guiding towards (i) global iron ore shipments in the range of 330 million to 340 million tonnes (100% basis), (ii) mined copper in the range of 525,000 to 665,000 tonnes and refined copper of 185,000 to 225,000 tonnes, (iii) bauxite in the range of 48 million to 50 million tonnes, alumina in the range of 8 million to 8.2 million tonnes and aluminium of 3.5 million to 3.7 million tonnes, (iv) 17 million to 18 million tonnes of thermal coal, 7.8 million to 8.4 million tonnes of hard coking coal and 3.3 million to 3.9 million tonnes of semi-soft coking coal, (v) uranium in the range of 6.5 million to 7.5 million pounds, and diamonds in the range of 19 million to 24 million carats.

Price

We view Rio Tinto’s recent clearance of the 50% Fibonacci retracement of $62.69 as being a positive development for the miner’s share price. Over the broader term, we would expect prices to gravitate towards the barrier of resistance situated between $67.89 and $72.30. This is made up of the February and August 2014 resistance levels and the February 2012/2013 resistance levels, respectively.

Worth buying?

In our view, the operational numbers for the full year reinforce our positive view of Rio Tinto. While iron ore continues to be the mainstay, 2016 featured a wider positive set of outcomes across its operations. We believe the 2016 operational result will have a net positive impact on the company’s full year financials for 2016, which are scheduled to be released on 8 February 2017.

Rio Tinto has a robust balance sheet and has maintained a strong cash flow that places it in an in enviable position to develop its pipeline of projects and advance shareholder value across commodity cycles and over time. This, in combination with our expectation for rising commodity prices on the back of rising inflation in the US, underpins our positive view of the stock at the current share price.

David Lennox is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Rio Tinto is held within the Fat Prophets Concentrated UK Share, Fat Prophets Mining and Resources and Fat Prophets Concentrated Australian Share portfolios.

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