FINANCIAL ANALYSIS

RIO TINTO
NYSE:RIO

INDIVIDUAL ASSIGNMENT – HULT BUSINESS SCHOOL

STEVEN SON VAN DE WIELE

CONTENT TABL
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INTRODUCTION 3

KEY EVENTS & MARKET INSIGHTS 4

COMMODITY MARKET VOLATILITY FOLLOWING COVID-19 4

SANCTIONS: RUSSIAN-UKRANIAN WAR 5

DECARBONIZATION OF CHINA’S STEEL OUTPUT 5

LOOMING GLOBAL RECESSION & CURRENCY EPRECIATIONS 6

UPGRADED RATING MOODY’S 6

CONCLUSION & MARKET INSIGHT FOR RIO TINTO 6

STRATEGIES & MARKET FORECAST 7

LONGTERM STRATEGIES 7

MERGER & ACQUISITIONS “DEALMAKING” 8

RATIO ANALYSIS 9

Summary of Ratio Analysis 9

PERFORMANCE ANALYSIS 10

1. GROWTH IN SALES 10

2. EBITDA MARGIN 10

3. CASH TAX RATE 11

4. WORKING CAPITAL INVESTMENT 11

5. FIXED ASSETS INVESTMENT 11

6. WEIGHTED AVERAGE COST OF CAPITAL (WACC) 11

7. COMPETITIVE ADVANTAGE PERIOD 11

EXECUTIVE SUMMARY 12

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2
Source: Rio Tinto (2008)

INTRODUCTION
Rio Tinto is a British-Australian mining consortium. The consortium exists out of the British company Rio Tinto
PLC and the Australian Rio Tinto Limited. The key products are iron ore, aluminum, diamonds, copper and
industrial minerals. Rio Tinto PLC is listed on the New York Stock Exchange and the London Stock Exchange and
Rio Tinto Limited is listed on the Australian Securities Exchange.

*note: Due to complexity of commodities and the not yet published annual balance sheet/income statements/cashflow I limited myself to
analysing data from 2019/2020/2021 and partly 2022 – After analyzing trends in the commodity markets the final conclusion / advice would be
slightly different today in 2023 than it would have been in 2022. I choose RIO TINTO due to my close professional relationship with buying,
selling and shipping steel, copper and other commodities.

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KEY EVENTS & MARKET INSIGHTS
The past years have been exceptionally volatile for commodities. The commodity market hit all-time
heights and opposing there were major drops in demand. From China’s zero COVID policy to looming
recession and on-going war in Ukraine made the prices go up and down from record lows to record highs.
The global economy is driven by commodities. Therefore policies, technical innovation and economic
growth go hand in hand with the supply/demand of these commodities. Rio Tinto is one of the largest
conglomerates supplying ferrous and non-ferrous products. Them being a market leader makes RIO
sensitive to key events that directly affect the prices of commodities. When analyzing RIO’s performance
and prospects it is of key importance to track and understand these markets.

Rio Tinto segmentizes in 4 main business units:

(1) IRON ORE

(2) ALUMINIUM
(3) COPPER
(4) MINERALS

RIO’s segments are all heavily influenced by world events that have been occurring in the world. The
most important key event affecting the four main business units:

(1) DECABORNIZATION (PARIS AGREEMENT NOVEMBER 2016)

(2) RCESSION FOLLOWING COVID-19 PANDEMIC (WEAKER STEEL DEMAND)
(3) CHINA’S ZERO COVID-POLICY
(4) RUSSIA’S INVASION OF UKRAIN AND FOLLOWING SANCTIONS ON RUSSIA
(5) LOOMING GLOBAL RECESSION

COMMODITY MARKET VOLATILITY FOLLOWING COVID-19

The volatility of the iron ore prices is a direct consequence of the above-mentioned key events. Starting
November 2016 at $73.1/dmt (Index Mundi) to a steady growth in price to January 2019 at $76.16/dmt.
(Index Mundi) Although in 2020 Covid-19 hit, the iron ore markets remained relatively resilient. After the
lift of China’s Zero Covid Policy and restart of the world economy Wei Quan Thong (2022) reported the
2021 prices as followed: “Platts 62% Fe IODEX started the year at $164.5/dmt Jan. 4 and rallied to
$233.1/dmt, an all-time high May 12, before dropping 48.9% from the peak to close at $119/dmt on Dec.
31.” Minh Zhang and Enrico Dela Cruz (2021) reported that 2021 prices dropped 12% after Beijing’s
strict output curbs to meet climate change goals after the prices quadrupled in 2019 and tripled in 2020.

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SANCTIONS: RUSSIAN-UKRANIAN
WAR
Following the COVID situation a new key event
(2022) shook the world of commodities; Russia
invading Ukraine changed the focus of energy,
copper and iron ore exportation. The Western world
had to look for new sources of iron ore which
resulted in a sudden increase in demand and thus
price increase. According to a published article by
Misa Hama in Nikkei Asia, Russia produces 3,5% SOURCE: LME (2023)
of the world’s copper, 5,4% of its aluminum, 9,3%
of its nickel and 42,8% of its palladium. Copper as a global indicator of the economy reached a height of
$10,845 PMT while Nickel surged 70% on the London Metal Exchange. Next to the political pressure to
stop sourcing from sanctioned countries, the added logistics cost for sourcing from these sanctioned
countries affect the prices.

DECARBONIZATION OF CHINA’S STEEL OUTPUT

Another key event for iron ore is the China’s decarbonization of steel output and the reduction of
imported iron ore. According to a column by Clyde Russel (2022), the structural shift in demand will be
caused by decarbonization and lack of new supply.

As generally known China is the main driver of iron ore prices as well as the LME/PLATT’s copper
prices. Steven Vercammen (2022) in McKinsey Quarterly wrote that the steelmaking industry is shifting
toward low-carbon steel production that required high carbon iron ore or the usance of high-quality scrap
metal. He noted that steel companies
and in direct result iron ore suppliers
that decarbonize their operations will
be better placed to capture new market
opportunities in the long term.

LOOMING GLOBAL
RECESSION &
SOURCE: TRADE ECONOMICS (2023) CURRENCY
DEPRECIATIONS
Worldbank published an article by
John Baffes & Peter Nagle (2022) which states how depreciating currencies are driving food and fuel

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prices up. A general stop of economic growth and recession is a direct consequence. According to their
study metal prices fell in 2022Q3 by 20% due to weakened global industrial demand and stress on
China’s property sector.

UPGRADED RATING MOODY’S

Rio tinto’s rating at Moody’s investors Service got affirmed A2 for Long Term credit rating on April 24,
2020. The previous rating from 2016 was A to BAA1 negative rating. (Cbonds, 2022)

The upgraded rating will positively impact the ability to succeed in M&A through debt financing and
leveraging.

CONCLUSION & MARKET INSIGHT FOR RIO TINTO

For RIO the volatility worked out great. RIO had enough leverage, assets and supply to play into the
sudden spikes of market demand. RIO had great results and worked their way up from an EBIT of -9B
USD to a profit in 2019 of 12,053B following a result in 2021 an EBIT of 31,43B USD. Besides the
positive results, Rio Tinto also published their strategies for 2022/2023 and onwards to anticipate the
need of decarbonization of iron ore. From a procurement or investors standpoint the volatility, sanctions,
decarbonization and looming recession are a dangerous mix that result in a high-risk / high-reward
situation. Rio Tinto in comparison to the industry competitors is well positioned to play and navigate the
market and thus can be calculated investment with high implied odds. The coming technological advances
and global economic recovery will be the central stage for RIO.

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STRATEGIES & MARKET FORECAST

Source: RIO TINTO Annual report 2022 (Rio Tinto, 2022)

LONGTERM STRATEGIES
Rio Tinto’s published reports make their strategies and objectives clear; RIO’s leaders understood that
their success is dependent on their adaptability and taking a leading position in the fight for
decarbonization. Their unique position makes it possible for them to anticipate market volatility and a
possible recession. The strategy they are choosing is to use the past three years of record results for
investing and strengthening their assets.

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 In London at The Business Wire, Rio Tinto provided many updates at their investor’s seminar. Their
focus was to make sure its long-term strategy strengthens the business and grows in a decarbonizing
world and continues to deliver attractive shareholder returns. (Rio Tinto, 2022).

Rio Tinto Chair Jakob Staus holm said the business wire (Rio Tinto, 2022): “We are now creating real
momentum, to build a stronger Rio Tinto that is a platform for delivering long-term value. From evolving
our culture, to operational improvements, a different approach on
cultural heritage, and technology breakthroughs to address
climate change and a changing customer environment, we are “The quality of our assets, resilience of
seeing early results that give us conviction we have the right cashflows and strength of our balance sheet
ensure we are well positioned to continue to
objectives, the right team, and the right strategy. This is all invest with discipline for the long term and
captured in our newly defined purpose: finding better ways to deliver attractive returns to our shareholders
throughout the cycle.” - CEO Jakob
provide the materials the world needs.”
Stausholm (Rio Tinto, 2022)

The goals and long-term strategies of Rio Tinto to use the

momentum of the past few years are clear and well targeted.
Because of their leading position Rio Tinto is well positioned to keep driving the results up and creating
solid returns for shareholders and investors.

MERGER & ACQUISITIONS “DEALMAKING”

The approach of the in May 2022 appointed Chair will be to revamp and refocus on new M&A’s after
some past disasters in that area. Dominic Barton mentionned in an interview with the Financial times that
large mining groups need opportunities of acquisition for the energy transition. (Helen Thomas, Leslie
Hook, 2022) Due to huge demand and lack of mining opportunies, acquisition will be central strategy in
maintaining momentum and steady growth while hedging against the dependency of iron ore imports of
China. Rio Tinto with Dominic Barton (former McKinsey managing partner) at the head of the table has a
solid position to win bids for acquisitions.

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Source: https://www.riotinto.com/
 RATIO ANALYSIS
All ratios and short analysis in Appendix A

Summary of Ratio Analysis

Ending with the published 2021 annual income statement, balance sheet and cashflow sheet we can
deduce that RIO is liquid with a strong cash position to pay off short-term debt. The liquidity position of
RIO is improving and is outperforming the industry. The liquidity position creates room to be able to
(re-)invest in assets, M&A’s and R&D. Based on the market volatility RIO can solidify their position as a
leader and direct the direction the industry will be heading in. Besides having enough cash to pay debt,
RIO is improving their solvency rating and is creating room to leverage assets when immediate reaction
in the commodity market is needed. RIO is also improving vastly their profitability and efficiency year-
on-year and outperforming the competition. The valuation of RIO is slightly overvalued when comparing
BVPS against share price. The most logical explanation is the high dependency of the commodity
markets. On the other hand, RIO is undervalued when comparing the performance and profit, which
makes RIO a lucrative dividend for shareholders and investors.

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Source: https://www.riotinto.com/
PERFORMANCE ANALYSIS
1. GROWTH IN SALES
The sales have grown exponentially, which indicates resilience in this volatile market. From 2019 at
26.753B to 2021 at 44.934B USD (+67,9% increase). The slow recovery of the Chinese market and
looming recession are factors that might affect the growth in sales in the future. Rio Tinto succeeded and
is continuously to be successful in converting this growth in sales in Cashflow and thus not losing
liquidity in the process. Rio Tinto is ready to make new investments in their assets and solidify their
position.

2. EBITDA MARGIN
The earnings almost doubled from 2020 to 2021 in the most challenging environment. The earnings can
be well used to invest in their assets for technological advancement of decarbonization and connected
new mining opportunities. Besides investment capacities the high EBITDA margin results in high
capacities and flexibility to pay interest, taxes and dividends. As stated in the ration analysis RIO makes a
lucrative dividend due their strong results. Even with the uncertainty and volatility of prices RIO is
looking to show steady profits and results for investors, creditors and the commodity market in general.
According to an article published by McKinsey written by Berbner, Lath, and Jukka there (2022) will 5
areas of focus that can help miners to capture value over this decade: Development of a growth agenda,
deployment of technology, treat ESD as a source of value, collaboration, developing ‘talent of the future’.
On all of these 5 areas RIO is outperforming the industry. Data measured by GuruFocus (2022) is in the
top 5 of EV-EBITDA performers.

source: GuruFocus.com (2022)

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3. CASH TAX RATE
Rio Tinto operates in different countries and tax regions. The group effected corporate income tax and
royalties rate on underlying earnings were in 2021, 2020, 2019 were respectively 28.0% (Rio Tinto, 2022)
/ 37,3% (Rio Tinto, 2021) / 39,3% (Rio Tinto, 2020). The biggest share of paid taxes is Australia as half
of RIO’s operations are located there. For RIO it will be important to keep the taxes in Australia as low as
possible as more than half of the performance of the cash tax rate is driven by one country/region.
Distortion in the Australian tax system can result in less positive results for RIO’s shareholders.

4. WORKING CAPITAL INVESTMENT

Referring to Appendix a Liquidity Ratio’s.

5. FIXED ASSETS INVESTMENT

The fixed assets had a steady growth. From 2019 to 2021 a gain of 11%. This gain resembles a steady and
disciplined investment strategy. For shareholders the gain of 11% in comparison to an EBITDA gain of
160% means that RIO is investing conservative and favoring paying out record high dividends.

6. WEIGHTED AVERAGE COST OF CAPITAL (WACC)

The calculated WACC of RIO TINTO PLC:

2021 2020 2019

WACC 6,07% 5,37% 5,85%

Rio Tinto is a top-performer in comparison with the industry. Besides the WACC is considerably lower
than the ROCE which means capital costs is optimal and RIO is creating value as it grows. From an
investors standpoint the weighted average cost of capital indicates a healthy environment to invest in due
to added value.

7. COMPETITIVE ADVANTAGE PERIOD

Rio Tinto general performance in relation with the industry positions them favorably. RIO’s strategies
concerning decarbonization, technological advancements and material growth should give them in a
volatile market an advantage. The looming recession might be an end of the advantage period RIO can
take against the competition.

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EXECUTIVE SUMMARY
Following the key events that hit the commodity markets, the growth and steady results made RIO
solidify their position as an industry leader. RIO’s strategic long-term plans and ‘dealmakers’ will make
sure the technological advancement and M&A’s will have maximum effect. RIO’s performance is
positive and competitive. The growth in sales and earnings are certainly noteworthy. All the financial
ratios are improving, steady and competitive, which indicates RIO is an interesting profitable investment
and/or dividend. An external factor (danger) is the looming recession and the possible drop in steel
demand can mean a possible halt to the astronomical growth of earnings. Summarizing, RIO is
performing excellent and numbers are indicating steady earnings and growth; to say decisively if RIO is a
good investment, we will have to keep a close eye on the commodity markets.

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REFERENCE LIST
Cbonds (2020, April 24) Moody's Investors Service affirmed the "A2" LT- local currency credit rating of
Rio Tinto. Cbonds.
https://cbonds.com/news/1230439/

Clyde Russel (2022, March 30) Column: Iron ore may see structural shift on lack of new supply,
decarbonization. Reuters.
https://www.reuters.com/markets/commodities/iron-ore-may-see-structural-shift-lack-new-supply-
decarbonisation-2022-03-30/

GuruFocus (2022) Rio Tinto EV-to-EBITDA Historical Data.

https://www.gurufocus.com/term/ev2ebitda/RIO/EV-to-EBITDA/RIO

GuruFocus (2022) Rio Tinto EV-to-EBITDA Historical Data.

https://www.gurufocus.com/term/ROA/RIO/ROA-Percentage/RIO

Helen Thomas, Leslie Hook (2022, October 21) Rio Tinto seeks deals for growth. FINANCIAL TIMES.
https://www.ft.com/content/a5b67796-2023-43fb-b4c9-d57545f3a418

IndexMundi (2022, July-December) Iron Ore Monthly Price - US Dollars per Dry Metric Ton
https://www.indexmundi.com/commodities/?commodity=iron-ore

Investopedia (2022) How to Calculate Return on Equity (ROE)

https://www.investopedia.com/ask/answers/070914/how-do-you-calculate-return-equity-
roe.asp#:~:text=The%20S%26P%20500%20had%20an,or%20lower%20than%20this%20average

Jochen Berbner, Vivek Lath, and Jukka Maksimainen (2022, July 1). Navigating a decade of challenges:
Five winning initiatives for mining CEOs. McKinsey.
https://www.mckinsey.com/industries/metals-and-mining/our-insights/navigating-a-decade-of-
challenges-five-winning-initiatives-for-mining-ceos /

John Baffes & Peter Nagle (2022, October 26) The Commodity Markets Outlook in nine charts.
WorldBank.
https://blogs.worldbank.org/developmenttalk/commodity-markets-outlook-nine-charts

London Metal Exchange (2023). https://www.lme.com/Metals/Non-ferrous/LME-

Copper#Trading+day+summary.
https://www.lme.com/Metals/Non-ferrous/LME-Copper#Trading+day+summary

Minh Zhang and Enrico Dela Cruz (2021, December 31). Iron ore futures end 2021 with 12% drop amid
China climate efforts. REUTERS.
https://www.reuters.com/markets/commodities/benchmark-iron-ore-end-2021-with-12- plunge-amid-
china-climate-efforts-2021-12-31/

Misa Hama (2022, March 28) Palladium, copper and nickel hit historic highs on Russia sanctions.
NikkeiAsia.
https://asia.nikkei.com/Business/Markets/Commodities/Palladium-copper-and-nickel-hit-historic-
highs-on-Russia-sanctions

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Steven Vercammen (2022, August 1) TRANSITION TO NET ZERO. McKinsey Quarterly.
https://www.mckinsey.com/capabilities/sustainability/our-insights/spotting-green-business-
opportunities-in-a-surging-net-zero-world/transition-to-net-zero/steel

Wei Quan Thong (2022, March 11). Key trends in iron ore market amid volatile trading environment in
2021. S&P Global.
https://www.spglobal.com/commodityinsights/en/market-insights/blogs/metals/031122-iron-ore-
prices-iodex-trade-overview-2021

ReadyRatios (2022) Metal Mining: average industry financial ratios for U.S. listed companies.
https://www.readyratios.com/sec/industry/10/

Statista (2022) Net profit margin of the top mining companies worldwide from 2002 to 2021, with a
forecast for 2022.
https://www.statista.com/statistics/208725/net-profit-margin-of-the-top-mining-companies/

Rio Tinto (2022) Rio Tinto Annual Report 2019/2021/2022.

https://www.riotinto.com/invest/reports/annual-report

Rio Tinto (2020-2022) Rio Tinto Tax Reports 2019/2021/2022.

https://www.riotinto.com/invest/reports/taxes-paid-report

Rio Tinto (2022, November 30). Rio Tinto progresses strategy to strengthen, decarbonize and grow. The
Business Wire.
https://www.businesswire.com/news/home/20221129006177/en/

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