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Summary of Operations
Rio Tinto owns and operates mines across the world that produce a variety of metal ores but primarily derives its income from the sale of iron and aluminum. The company has low debt, finances growth with its own cash, and pays most earnings to shareholders through dividends.
Here is a description of their more prominent assets.
Iron
Pilbara Region, Australia, network of 16 mines, produces Pilbara Blend iron, nearly all of company’s Operating Cash Flows. Highly automated (efficiency, minimal injuries).
Aluminum
A series of mines, smelters, and refineries in Canada for production of aluminum, alumina, and bauxite.
Copper
They are currently working on an untapped copper project in Arizona, which they believe could meet about 25% of American copper demand, which continues to rise in demand.
Strategy
Since Rio mines and sells commodities, the key idea is to lower costs and to invest capital to achieve that, so that if commodity prices crash, they are still profitable—which the company tends to accomplish. Rio seeks to return value to shareholders primarily with dividends, typically at a payout ratio of 73% of earnings. This is the likely reason that current yield is 8.75%. While they don’t retain much for reinvestment, they do seem to make use of extra cash as prices rise to pay off debt and keep the balance sheet healthy, a good sign.
They use on-site power plants (typically hydro and solar) to meet their electrical needs and consistently reduce workplace injuries. About 22,000 (50%) of their employees are shareholders of the company, suggesting labor is reasonably aligned with the success of operations. Similarly, executive compensation is very structured and tied to productivity. This seems like a well-run company.
Growth and the Future
The average operational lifetime of their current sites is about 17 years each, so cash flows should be stable. Growth will likely come from rising demand and higher prices for iron and aluminum globally as more countries industrialize and urbanize, along with acquisitions of new mining assets. About five new sites will be operational in the next five years.
Much of current capex is on the copper assets, which are largely undeveloped. This is a project worth following, as the returns could be huge.
Valuation
With the high yield and payout ratio, it make sense to value this as a dividend stock.
Growth Assumptions: 6%
Intrinsic Value Per Share: $74
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