September 2021
As with any mining company,
Rio Tinto's
bottom line is
heavily linked
to the price of the
commodity it mines. For RIO, these are
iron ore,
aluminium
and
copper.
Over the last 12 months, metal prices have
surged
leading to record results for many mining companies. Unfortunately, prices of base industrial metals are now
dropping
almost as swiftly as they increased. In mid-August, iron ore prices slumped to eight-month lows, dropping almost
40%
from their record highs in May. This has impacted steel prices too, as steel is made from iron ore. The price of copper is also at
six-month lows.
What has caused this fluctuation? Metal prices fell primarily because of developments in
China. The country's industrial production grew at a much slower pace than anticipated in June, triggering fears about decelerating growth. Its steel output has now declined for two consecutive months as the nation is slapping production controls to curb pollution.
Meanwhile, fears of the Federal Reserve tapering bond purchases are also weighing down on metal prices as reducing bond-buying typically boosts the U.S. dollar, making dollar-priced commodities like metals
more expensive
for buyers from outside the U.S.
What does this mean for Rio Tinto? The sky-high prices of metals weren't going to last forever, but prices should now stabilise after falling, as aluminium and copper are increasingly
desirable
for their use in lightweight, electric vehicles. Iron ore and steel are key materials in
construction, which will be on the increase overall in the next couple of years, especially in the US under Biden.
Most importantly, Rio Tinto is much better placed to ride out the cyclicality after the
fantastic financial year
they have had in 2020 and H1 of 2021; flush with cash and with strong balance sheets. Some quite
phenomenal financial highlights
for Rio Tinto are outlined below.
It is worth bearing in mind, however, that since these results we have seen a
large drop
in the price of base metals, meaning Rio's full year results are likely to be
less spectacular. This has been reflected in Rio's share price which - rather than taking off after these results - dropped around
15%
in August.
There are a couple of other things we want to say about Rio Tinto other than its current financial situation.
Firstly, it has a history of being
incredibly well-run, with strong management and excellent business strategy, particularly over the last 50 years. It has a strong
competitive advantage
and a
wide moat, the sort of stock Buffet would love to get his teeth into; this was also noted in Selecting Shares that Perform
by the Financial Times, which named Rio Tinto as one of their '3 UK Stocks Buffett Would Own'.
Furthermore, Rio has a history of maintaining and increasing their
dividend payments. Both a sign of stability and a culture of returning value to their shareholders. You can see their 10-year dividend history below:
Source: https://seekingalpha.com/symbol/RIO/dividends/history
Conclusion
Rio Tinto has been a wonderful company for investors over the very long term; providing
stable returns and
increasing dividends for several decades.
The last 18 months have seen them make huge profits in line with inflated metal prices, leading to a
strong balance sheet and
excellent interim results across the board. Now though, global economic factors have led to a
decrease in metal prices, meaning forecasts for several mining companies have dropped, taking their share price down with them.
We see this as a buying opportunity for an excellent company trading at a
discount. Rio Tinto is the type of company to hold for the
long term and could make up a part of our portfolio for years to come.
We will be adding it to the CC
portfolio on Monday.
