July 2022
Why We Bought in 2021 - Strong financials
- Incredibly well-run, historic company
- Excellent business strategy
- Competitive advantage and a wide moat
- History of maintaining and increasing their dividend payments
Why we're reinvesting in 2022
All of the above is still
true, and now we can add that they have made an
enormous amount of cash in the last calendar year.
In February, Rio Tinto reported its year-end financials, which featured a company
record for cash flow. Whereas Rio Tinto generated free cash flow of
£8.4 billion in 2020, the company set a new high-water mark in 2021, reporting free cash flow of
£14.2 billion. The driving forces behind the
strong cash flow growth came from the aluminium and copper businesses, which accounted for year-over-year free cash flow growth of
155% and
289%, respectively.
Unsurprisingly, this ample cash flow growth has helped the company shore up its balance sheet. Rio Tinto's CEO, Jakob Stausholm, said the company's balance sheet is now "the
strongest it's been for at least 15 years," in the press release accompanying the earnings report. Rio Tinto ended 2021 with a net cash position of
£1.3 billion, representing a considerably more
robust position than where it was at the end of 2020.
If you look at the financials at the moment, it isn't hard to see why the CEO is happy with the current situation:
- Strong financials
- Incredibly well-run, historic company
- Excellent business strategy
- Competitive advantage and a wide moat
- History of maintaining and increasing their dividend payments
Why we're reinvesting in 2022
In February, Rio Tinto reported its year-end financials, which featured a company record for cash flow. Whereas Rio Tinto generated free cash flow of £8.4 billion in 2020, the company set a new high-water mark in 2021, reporting free cash flow of £14.2 billion. The driving forces behind the strong cash flow growth came from the aluminium and copper businesses, which accounted for year-over-year free cash flow growth of 155% and 289%, respectively.
So why the drop in share price? Rio's share price is being
smashed to pieces just like the rest of the market. Concerns about
rising energy costs, the environmental impact of mining and supply chain issues are among the reasons cited for the
drop in price.
We find it's best to keep things simple: this is a
great company trading at a
great price.
Furthermore, Rio's dividend yield is at a staggering
13% at the moment - the cherry on a very undervalued looking cake.
Conclusion
As we have said before, we like the way Rio Tinto is run,
astute management has meant the company has stood the test of time for around
150 years. It has made a huge amount of money in 2021 and is looking
stronger than we when we first bought in last year. The cyclical nature of mining means the share price of mining stocks fluctuate quite regularly, but it appears this is the right time to invest and we aren't going to miss out.
We will be
adding to our investment on Monday morning.
