Rio Tinto (NYSE:RIO), listed on the American stock market and headquartered in London, is but one of the subsidiaries of Britain's Rio Tinto Group which straddles the world. Its diversified mining, extraction, and processing activities mean that it produces metals that children know about such as gold and iron, but also produces things that would make adults go "huh" -- such as rutile and borates.
More than most mining and extraction companies, Rio seems to make news as a dance partner with one or another mining company. It has gone tangoing with BHP Billiton (NYSE:BHP), Chinalco, and, now, Ivanhoe.
Rio Tinto has - as one might expect - prevailed in its feud with Ivanhoe Mines Limited (IVN). At the heart of the dispute was a gold-and-copper mine in Mongolia. A press release issued by Rio indicates that its financial muscle has enabled it to gain control of the Ivanhoe boardroom. Actually, it was "a creeping takeover" that enabled Rio to wrest Mongolian mining properties that, as it happened, originally used to belong to its co-giant rival, BHP Billiton.
Rio's infamous and ill-fated dance with China's Aluminum Corporation of China Limited (NYSE:ACH) in June 2009 had leapt out of the Business News pages and onto the International News pages and country-to-country relations with China were threatened because "the original deal also raised fears among regulators in Australia that Beijing ... was taking too strong a grip on future production of iron ore and other Australian commodities." It was "the biggest deal in both Australian and Chinese corporate histories" that Rio pulled the plug on.
As a result, instead of gaining an investment of nearly $20 billion, it had to pay walk-away fees of nearly $200 million. The deal was scuttled by, besides regulatory antipathy, strong shareholder opposition. Nevertheless, the double-barreled blast dented Rio's share prices globally, including by 11% on the NYSE. Part of the reason for Australian opposition was to protect Australia's mineral assets from falling under Chinese control, and, as such, the split ignited heated reactions in China and was perceived as "a political event."
Considering that some years back Rio successfully warded off BHP Billiton's takeover bids, Rio is clearly the past master among mining companies at inter-company standoffs and warfare. This dance partner always wins.
The Rio-Chinalco saga (which even pulled in Australia and China at the sovereign levels and caused friction between Canberra and Beijing) is not over. Two years later in June last year Rio took "another step toward peace between the two firms" by entering into a joint venture for copper exploration in China. Indeed, Rio's C.E.O. implicitly accepted that matters between Rio and Chinalco are now tracked at the sovereign level when he spoke of an "expanding relationship between Rio Tinto and China."
After all this tumult, Rio's 2010 net income of $14.3 billion was nearly $10 billion better than the previous year. However, in a comparison with its peer competitors, these being Anglo American, BHP Billiton and Vale, Rio's strengths and weaknesses come into focus. It is more than twice the size of Anglo American (OTCPK:AAUKF) (approximately $107 billion versus approximately $46 billion, but little more than half that of BHP Billiton, approximately $197 billion, and about the same as Vale's (NYSE:VALE) $118 billion. Interestingly, in all the important ratios like earnings-per-share, price-per-earnings, price/earnings to growth, the larger BHP beats out Rio, which beats out smaller Anglo American.
A head-to-head with Rio's similarly-sized competitor Vale proves inconclusive. There is little to choose between their earnings-per-share, 3.01 and 3.85, respectively. Rio's price-to-sales ratio is slightly better at 1.73 versus 2.13 but its slightly inferior operating margin of 38% versus 50% explains - and negates - the difference in the P/S ratio. However, Vale's net income (trailing twelve months) was over thrice that of Rio at $20 billion versus $6 billion. And this is indirectly reflected in Vale's very attractive price-per-earnings ratio of only 6 versus Rio's 19.
What conclusion to draw from these numbers, though? The answer, courtesy of George Costanza of Seinfeld: Rio is "right in that meaty part of the curve - not showing off, not falling behind." (George's observation about a student in a Seinfeld episode.) Among the mining and extraction majors, that's just what Rio is: middling, chugging along.
Rio's price-per-earnings (P/E) ratio of 18.75 among mining stocks is the highest and least attractive as its competitors' P/Es are in the single digits. However, Rio's forward P/E is a distinctly attractive 6.5 and its (forward) price/earnings to growth ratio (PEG ratio) is only 0.38. For a $100 billion capital-intensive corporate mammoth, these numbers may betoken a healthy company whose stock may begin to nudge upwards, barring the sorts of Acts of God that can affect any mining and extraction company.
The question "What next for Rio Tinto?" would be like asking "What next for gold, diamonds, aluminum, zircon, silver, titanium dioxide ... ?" whereas for many competitors the question would be a little narrower.
Though Rio is more resilient, as a diversified player, to price fluctuations in two or three metals or commodities, significant underperformance drives down share price. Rio's Australian operations were disrupted by heavy rain. Reuters reported that its iron ore output plunged by 11% from the previous quarter. The output was 45.6 million tonnes as opposed to the estimate of nearly 50 million tonnes. Copper output fell by 13% as well. Output was only 119,500 tonnes versus estimates of 140,000 tonnes. As expected, share price took a slight hit. It is on such good news, bad news episodes that Rio's stock has bounced back-and-forth from $46.10 on a volume of 3.3 million on 19th December to a high of $62.70 on a volume of about 5 million on 3rd February to around $57 today.
That same Reuters story does have an important factoid: "Rio Tinto remains committed to a massive expansion of its iron ore operations in the Pilbara in Western Australia, where it expects to be producing at 283 million metric tonnes a year in the second half of 2013". Assuming that iron ore prices hold into next year, though this expansion would require capital investment, the enormous production increase would begin to pay off by 2014.
Also, the news is far from all bad: Only two months back the mass-media carried the story of a stunning find: a rare giant pink diamond found by Rio in Australia.
A colored diamond - called a "fancy" in trade lingo - after cutting and polishing, depending on color saturation and (lack of) flaws, can sell at auction for up to a million dollars a carat.
This particular fancy weighs in at 12.76 carats in its rough form and has been christened "Argyle Pink Jubilee." Rio proudly announced, "It has taken 26 years of Argyle production to unearth this stone ... Christie's has auctioned only 18 polished pink diamonds larger than 10 carats in its 244-year history."
The approximately $10 million dollars the Argyle Pink Jubilee will probably sell for is small change for a multi-billion dollar company but it gives a one-shot fillip to the bottom-line. More importantly, this kind of unusual "prestige" find makes for some general interest news and a "wow" factor. You can't get this kind of news if, like Vale, you're primarily into iron and base metals.
Perhaps Rio won't sell its Argyle Pink Jubilee. Perhaps it will wear its pink "fancy" the next time it starts to tango with a new dance partner, before it spurns it or triumphs over it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.