In perhaps the most famous line from the mid-1980s television show The A-Team, A-Team leader Colonel John “Hannibal” Smith (George Peppard) often said: “I love it when a plan comes together”.
Apparently, Hannibal Smith retired from the A-Team to join the executive team at the global mining giant, Rio Tinto PLC (RIO), because the company’s strategic moves over the past few years are really starting to come together. Long-term decision-making and some smart acquisitions are providing a strong growth path for the miner.
And you can still get in.
Production guidance for 2023, released in mid-January alongside Rio Tinto’s fourth quarter output numbers, shows increased output for iron ore, copper and alumina/bauxite. And the company is moving quickly to build a lithium test plant at the Rincon mine in Argentina, which it bought last year—a really important move for Rio Tinto’s future.
RBC analyst Tyler Broda recently agreed that the company’s long-term planning was bearing fruit. He told clients that “The company’s portfolio has some compelling options and, unlike the other majors [mining firms], offers growing lithium exposure.”
I believe lithium will become a bigger part of the company’s future.
Rio Tinto signed a memorandum of understanding with Ford in 2022 that could result in the carmaker becoming a flagstone customer for the miner’s Argentine lithium supply. As the company’s CFO, Peter Cunningham, said: “Critical minerals is clearly important from a policy perspective for many governments [and companies] for security of supply.”
Rio Tinto Guidance
Rio Tinto is already an extraordinary company and organized into four segments: iron ore (65% of first half 2022 EBITDA), aluminum (18%), copper (9%), and minerals (8%). The minerals division produces salt, borates, mineral sands, and diamonds.
What really impressed me was the company’s exceptional fourth quarter results and its raised guidance. Rio Tinto’s 89.5 million tons of iron ore production translates to annualized production of nearly 350 million tons. Guidance for 2021 was at 320 million to 335 million tons. The company held onto 2022 cost guidance, and more specific numbers will be released next month. I suspect iron ore guidance will be raised at that time.
Rio Tinto hiked another key metal—copper— for 2023, to between 650,000 tons and 710,000 tons after the company bought out the minority investors in the Oyu Tolgoi holding company Turquoise Hill Resources for $3 billion. Copper production last year for Rio Tinto was 521,000 tons.
For those of you unfamiliar with Oyu Tolgoi, it is located in the South Gobi region of Mongolia and is one of the world’s largest known copper and gold deposits. At peak production, Oyu Tolgoi is expected to produce 500,000 tons annually of copper.
Why Buying Rio Tinto is a Good Idea
Argus Research summed up nicely why Rio Tinto is a buy: “Rio Tinto has strengthened its operating performance and balance sheet by cutting costs and selling non-core assets. It also continues to return cash to shareholders through dividend increases. Despite the recent drop in commodity prices, we note that Rio has traditionally performed well during difficult economic times, and, in our view, has strong long-term growth opportunities.…On the fundamentals, Rio’s ADRs are trading at 7-times our 2022 EPS estimate, well below the five-year average.”
I would add that the expected full reopening of China’s economy after several years of coronavirus pandemic-related lockdowns will boost demand greatly for what Rio Tinto and other miners produce. China accounted for about 60% of Rio’s sales in 2021.
And Rio Tinto has a large portfolio of long-lived assets with low operating costs. That means it is one of few miners that can remain profitable throughout the commodity cycle. Most of its ore sources come from operations located in the safe havens of Australia and North America.
Rio Tinto pays a regular dividend twice a year, in April and September, and often also pays a special dividend. Management’s target payout ratio is 40% to 60% of underlying earnings.
The 2018 dividend was $4.08, or $3.08 from the regular dividend plus a $1.00 special dividend. The 2019 dividend was $4.43, including a regular dividend of $3.82 and a special dividend of $0.61. In 2020, it paid a regular dividend of $4.64 and a special dividend of $0.93. In 2021, it paid total dividends of $13.49 per share.
Dividend estimates are $8.00 for both 2022 and 2023. However, with China reopening, commodity prices are likely headed higher in 2023. This will boost the fortunes of Rio and other miners.
I suspect the dividend for 2023 will be closer to $10.00 per share. But even if it does come in at $8.00, the dividend yield would still be in excess of 10% based on the current stock price.
Rio Tinto is a buy anywhere in the $70s per share.
“You’re an idiot if you’re not investing in…”
That’s what my old coworker told me years ago. I listened up because he was the most successful broker I ever worked with. And also incredibly lazy. He found a small niche in the market no one talks about and made enough to buy in the most expensive zip code in Maryland. Here’s what he invested in.