Oxford Brookes University

Research and Analysis Project

Business and Financial Analysis of Rio Tinto

over a three-year period
ACCA REG
ACCA Registration Number: 2768456
Mentor: Mr. Tahir Sartaj
Reasons for choosing Rio Tinto and Topic 8

 Opportunity to practically apply the knowledge gained in academic

studies.
 Use of analytical and professional skills.
 Rio Tinto is one of the biggest mining giants in Australia and has
many operations and sectors spread out worldwide.
 Rio is largest employers in Australia and has been regarded as
Forbes best employers of Canada for 2019.

ACCA Registration Number: 2768456

 About Rio Tinto

 Rio was founded in the year 1959 and incorporated on March 30, 1962.

 Core business is finding, mining and processing of mineral resources.

 Four main revenue segments are Iron Ore, Copper & Diamonds, Aluminum and Energy & Minerals.

 Market Capital is $103.15 Bn as of April 18, 2019, making it the biggest mining company in the industry.

Industry Analysis

• Australian mining industry is one of the oldest industries in Australia and the major contributor towards
Australian economy.
• Contributes to almost 7% in the national GDP.
• Industry is export focused and since 2007-2008 it has contributed 50% to 60% towards national exports.
• Australia is one of the world’s top five producers of gold, iron ore, lead, zinc and nickel.

ACCA Registration Number: 2768456

Industry Sales and Market Share

Industry Sales Market Share 2018 (By Revenue)

US$ Mn
47,500
32,500 16.87%
22.34%
17,500
2,500 9.38%
BHP Billiton Rio Tinto Vale Anglo Ameri- Vedanta 26.66%
can
2018 43638 40522 36575 27610 15358.7 24.75%

2017 38285 40030 33967 26243 11520.1

2016 30912 33781 27488 21378 10737.9
Anglo American BHP Billiton Rio Tinto
2018 2017 2016 Vedanta Vale

• Dynamic and continuously evolving industry in terms of technology and

commodity prices.
• Industry Revenue has increased by 31.7% from the year 2016 to 2018.
• Market Share of Rio Tinto is 24.75%
• Rio Tinto is the second largest miner after BHP Billiton.

ACCA Registration Number: 2768456

RAP Objectives

 Financial Analysis of Rio Tinto with BHP Billiton over a three-year period.

 Business analysis of Rio Tinto.

 Comparison of Rio Tinto with a competitor.

 Conclusion and Recommendations made following analysis.

RAP FRAMEWORK

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 Sources of Information

Annual Reports of Rio and BHP Company’s Official Website

Sources of Information

Other websites News and Media

Limitations of Sources of Information

Ethical Considerations

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SWOT Analysis

Strengths
Weakness
-Investment in
-Breach of
technologically
environmental buffer
advanced mines
zone
-Strong Ratios
-Weak Ratios
-Automated Long
-Allegation of
Distance Rail
Misconduct
Network

Opportunities
-Proposed Pilbara Threats
Project -Fall in China’s Iron
-Possible Discovery Ore Demand
of Copper Mine -Cost Pressures
-Koodaideri Iron Ore -Price Volatility
Project

ACCA Registration Number: 2768456

 PEST Analysis
• Australia-China • US-China Trade
relations. Wars
• South Africa
Investment

Political Economic

Technological
Social

• Creation of Jobs • Use of Advanced

• Aluminum Fund Methods
Canada • Use of Virtual and
Augmented Reality

ACCA Registration Number: 2768456

Horizontal Analysis

Sales
US$ Mn
47,500
42,500
43,638
37,500 40,522
40,030 38,285
32,500
33,781
27,500 30,912
22,500
17,500
12,500
7,500
2,500
2016 2017 2018
Rio Tinto 33,781 40,030 40,522
BHP Billiton 30,912 38,285 43,638

 Rio reported rise in its revenue of Diamond segment of up to 15%

 Rio’s sales contributed by rising iron ore and aluminum prices and increased production
 Rising iron ore prices also led to increase in BHP’s revenue
 Revenue of BHP has risen from $38,285 Mn in 2017 to $43,638 Mn in 2018

ACCA Registration Number: 2768456

Profitability
Operating Profit Margin Net Profit Margin
50.00% 40.00%
43.65% 34.36%
40.00% 35.31% 36.66%
30.00%
30.70%
30.00% 22.11%
20.00% 17.75% 16.25%
20.11% 14.14%
20.00%

Axis Title
10.00%
10.00%
0.00%
0.00% Rio Tinto BHP Billiton
Rio Tinto BHP Billiton
-10.00% -10.00%

-20.00% -20.00%
-20.17%
-20.08%
-30.00%
-30.00%

2018 2017 2016

2018 2017 2016

• Net gains on disposals of Rio’s coal business for $2.69 Bn

• Higher iron ore and copper volumes sold globally
• BHP recovered from loss to profit
• Aluminum and copper also contributed in the increase of Revenue
ACCA Registration Number: 2768456
Liquidity

Current Ratio Quick Ratio

3.00 2.50
2.24
2.51
2.50
2.00

2.00 1.91 1.85 1.58 1.53

1.66 1.61 1.50 1.35
1.44 1.29
1.50 1.16
1.00
1.00

0.50 0.50

0.00 0.00
Rio Tinto BHP Billiton Rio Tinto BHP Billiton

2018 2017 2016 2018 2017 2016

• Higher iron ore production shipped from Australian mining operations in 2018.
• Classification of other investments in highly liquid financial assets as held for trading
• BHP onshore US oil and gas assets classified as held for sale

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Activity Ratio

Cash Operating Cycle

30
27
25 24
23

20 18

15 13

10
5
5

0
2018 2017 2016

Rio Tinto BHP Billiton

• Rio marginally improved working capital management

• BHP cash management significantly improving since 2016 by substantial increase in
payable days
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Leverage Ratios
Gearing Ratio Interest Cover
46.00% 30.00

43.66% 25.00 23.42

44.00%
42.74%
20.00 17.61
42.00%
40.62% 15.00 13.70

40.00% 10.39
39.42%
10.00 7.92
38.09%
37.79% 5.00
38.00%

0.00
36.00% Rio Tinto BHP Billiton
-5.00
34.00% -6.42
Rio Tinto BHP Billiton -10.00

2018 2017 2016 2018 2017 2016

 Bond buyback program of up to $2.5 Bn by Rio to cut debt

 Rio was bearing $14 Mn debt. By the end of year 2018 Rio paid off debt
 Decrease in interest bearing liabilities of BHP
 Rise in BHP operating profits of 36%
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Investor Ratios
Earnings per Share
1000.0

793.2
800.0

600.0
490.4

400.0
256.9
200.0
110.7
69.6

0.0
Rio Tinto BHP Billiton

-200.0 -120.0

2018 2017 2016

 Rio Net profit of $4.8 Bn. Announced $500 Mn of Share buyback

 BHP profit rose by 24.46% in 2018. EPS reduced due to loss from discontinued operations

ACCA Registration Number: 2768456

Conclusion

 Rio is profitable regardless of many obstacles

 Not overburdened by its liabilities and leverage ratio is reducing

 Rio is liquid enough to pay current liabilities out of its current assets

 Increasing share price

 Increasing net profit

 Initiated projects during the 3-year cycle like Pilbara and Koodaideri

ACCA Registration Number: 2768456

 Recommendations

 Strengthen liquidity position

 Manage payable days

 Reduce its gearing

 Opt for hedging instruments

 Diversity its investment portfolio

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 Thank You

ACCA Registration Number: 2768456