Review of Rio Tinto’s 2012 Report & the Aluminum Sector

Comprometida mineRio Tinto logo

Dear PGM-Capital, blog readers,
On Thursday February 14th 2013, British-Australian mining giant RIO Tinto (NYSE: RIO, ASX: RIO.AX, LSE: RIO.L world 3rd biggest miner by market cap, behind BHP Billiton and Vale), reported its H2-2012 and full year results.

Highlights 2012 financial results:

  • Underlying earnings of US$9.3 billion.
  • Net loss of US$3.0 billion after impairments of US$14.4 billion,  primarily relating to aluminum businesses as well as coal assets in Mozambique.
  • 15 per cent increase in full year dividend to 167 cents per share.
Twelve months to 31 December
(All amounts are US$ millions unless otherwise stated)
2012 2011 Change
Underlying earnings  9,303.00  15,549.00 -40%
Net (Loss) / Earnings  -2,990.00
 5,826.00 -151%
Cash flows from operations  16,450.00  27,388.00 -40%
Capital expenditure  17,418.00  12,298.00 42%
Basic (loss)/earnings per share from continuing operations (US Cents)  503.10  808.50 -38%
Underlying earnings per share (US Cents)  -161.30  303.50 -153%
 Ordinary Dividends per share (US Cents)  167.00  145.00 15%

Source:

The write-down of USD 11 billion of its aluminum sector, which was announed in January 20th of this year, lead to the immidiate resignation of its CEO Mr. Tom Albanese.

source:

Read also this article

The fact that the company has increased its dividend with 15% despite having booked a loss in 2012, clearly shows that without the write-downs in the aluminum business, the company would have made a profit in 2012.

In the past big diversified mining companies reduced their exposure to aluminum or sold their aluminum section to a third parties, in order to boost their profit.

Most investors may ask themselves what the problem is with aluminum, that it affects the balance sheets, cashflow and income statements of miners/aluminum producers negatively.

  • Aluminum is the third most abundant element (after oxygen and silicon), and the most abundant metal, in the Earth’s crust.
  • Aluminum is theoretically 100% recyclable without any loss of its natural qualities.
  • Production of Aluminum out of Bauxite ore is very energy intensive.
  • Aluminum can be replaced by cheaper magnesium or a stronger synthetic product in applications like:
    • Transportation (automobiles, aircraft, trucks, railway cars, marine vessels, bicycles, etc.)
    • Tubings etc
    • Packing materials, (cans, foil, etc.)
    • Construction (windows, doors, siding, building wire, etc.)
    • Street lighting poles, sailing ship masts, walking poles, etc

Mainly due to the above the price of Aluminum hasn’t recovered from its peak of July 2008 as can be seen from below 5-year chart.

spot-aluminum-5y-Large

Source:

Lower aluminum prices combined with higher production costs due to higher energy cost have resulted in lower profits or even loss for most mono aluminum companies, with the consequence of lower stock prices and dividend per share since July 2008 as can be seen here below for the two biggest aluminum producers; Alcoa (NYSE: AA) and Aluminum corporation of China (NYSE: ACH)

5 year chart Alcoa

 Source:

5 year chart ACH

Source:

On top of this, Alcoa has reduced its dividend per share from USD 0.17 a share in 2008 to USD 0.03 since May 2009, see link to dividend history Alcoa, while  Aluminum of China has reduced its dividend per share from USD 0.188 in April 2008 to USD 0.044 in April 2011, which was its last dividend payment see dividend history of Aluminum Corporatio of China.

RIO TINTO has increased its dividend during the last 10 years from USD 0.305 a share in April 2002 to USD 0.725 a share in September 2012 an increase of approx 137%.

Source:

For H1-2013 RIO TINTO Plc has increased its bi-yearly dividend with 15% to: £0.60  per share – Prelim. with an Ex Dividend date: 06 March 2013 and Payment date: 11 April 2013.

Source:

Based on the above we have maintained a Buy Rating on the stock of RIO-TINTO since March 2009, and a Sell Rating on all mono miners/aluminum producers.

Disclosure:

  • PGM Capital is an active investor in the stock of RIO-Tinto, we own it  in our personal portolio as well as in those of several clients .
  • We don’t hold any (mono) aluminum miners/producers in our own account nor in those of our clients.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

Leave a Reply

Your email address will not be published.