Several months ago, we recommended investing in Rio Tinto Group (NYSE:RIO). Since then, the company's stock price has recovered significantly, driving roughly 40% total returns. As we'll see throughout this article, given continued market growth, we see strong potential for increased Rio Tinto returns.
The company has continued to achieve incredibly strong results, highlighting the strength of the overall commodities market.
Rio Tinto Strong Results - Rio Tinto Investor Presentation
Rio Tinto managed to earn $63.5 billion in consolidated sales revenue, up 42% YoY. Underlying EBITDA increased 58% and net earnings by a more significant 116%. The company is modestly expanding capital expenditures (19%) and FCF by a very substantial 88%. That's enabled the company to pay out a near double-digit total dividend, while having additional cash.
Supporting the company's continued performance is strength in the commodity markets.
Commodity Market Strength - Rio Tinto Investor Presentation
Rio Tinto is, fundamentally, a commodity producer. It's outperformed from Iron Ore, Aluminum, and Copper price growth. All of these commodities have performed well going into 2022. Iron Ore, Copper, and Aluminum account for $16.5 billion of the company's $17.5 billion increase in EBITDA. Despite some costs, the company has continued to outperform.
De-carbonization is no longer a "hip" culture. Globally, the risks of climate change have been recognized, and companies are beginning to meaningfully change their emissions. Fortunately, there's a surprising amount of low hanging fruit, and as evidenced with the Pilbara gas-to-renewable replacement, emissions reduction and cost saving go hand in hand.
Rio Tinto De-Carbonization - Rio Tinto Investor Presentation
The company expects emissions to drop roughly 50% from 2018 until 2030 through a variety of significant projects. The company is spending $7.5 billion on these projects, or a fairly modest 10% of its capital spending until 2030. Many of these projects such as Pilbara renewables and Queensland Alumina projects will save the company costs.
We expect the company will continue to opportunistically take advantage of de-carbonization projects.
Rio Tinto is continuing to chase reasonable growth in its business, modestly increasing capital spending.
Rio Tinto Growth - Rio Tinto Investor Presentation
Rio Tinto spent $7.4 billion in 2021 capital spending. That's ramping up to $8 billion in 2022 with "Other replacement" consuming the company's more expensive "Pilbara replacement". Sustaining capital is expected to increase moderately but remain modest, with Pilbara Iron Ore still representing the largest share here.
Specifically in 2023-2024 the company is looking at roughly $3 billion in potential growth projects. These growth projects could enable the company to increase its long-term earnings, and highlight how there's continued opportunities available to the company.
Putting this all together, Rio Tinto has significant financial strength and the ability to drive substantial returns.
Rio Tinto Debt - Rio Tinto Investor Presentation
Rio Tinto's impressive cash flow has enabled the company to move towards a net cash position. The company's steady reduction in net debt means it now has a subtle cash position. If anything else it means that interest and debt paydown isn't a concern for the company, so it can utilize its cash flow completely towards shareholder returns.
The company distributed substantial dividend in 2021 while saving some cash. Going into 2022 and onwards, with continued price strength, we see the potential for continued double-digit dividends along with other opportunistic forms of shareholder returns. The company hasn't participated in a buyback in several years, however, with dividends, it's not necessary in our view.
The largest risk to the thesis in our view is commodity prices. While global demand for commodities is going up, prices in the industry tend to be incredibly volatile. Rio Tinto's cash flow has improved significantly over the past 1-2 years, however, there's no guarantee that it'll continue. That's a risk worth paying close attention to.
Rio Tino has seen its share price improve significantly since we last recommended investing in the company. We expect that performance to continue. The company has a unique portfolio of assets and on top of opportunistically investing in replacement, the company is expecting to start investing in growth as well.
The company has no net debt. It's focusing primarily on dividends enabling the potential for a double-digit dividend yield. As long as prices remain strong, which we expect, we expect a continued double-digit dividend yield. That reliable yield and the company's strong financial position helps to reveal the company as a valuable investment.
The Energy Forum helps you invest in energy, generating strong income and returns from a volatile sector. Our included Income Portfolio helps you invest in the broader market, finding high-yield non sector-specific opportunities.
Recommendations from a top 0.5% author on TipRanks!
Worldwide energy demand is growing and you can be a part of this profitable trend. Plenty of unique under the radar opportunities remain.
This article was written by
#1 ranked author by returns:
The Value Portfolio focuses on deep analysis of a variety of companies across a variety of sectors looking for alpha wherever it is to maximize reader returns.
Legal Disclaimer (please read before subscribing to any services):
Any related contributions to Seeking Alpha, or elsewhere on the web, are to be construed as personal opinion only and do NOT constitute investment advice. An investor should always conduct personal due diligence before initiating a position. Provided articles and comments should NEVER be construed as official business recommendations. In efforts to keep full transparency, related positions will be disclosed at the end of each article to the maximum extent practicable. The majority of trades are reported live on Twitter, but this cannot be guaranteed due to technical constraints.
My premium service is a research and opinion subscription. No personalized investment advice will ever be given. I am not registered as an investment adviser, nor do I have any plans to pursue this path. No statements should be construed as anything but opinion, and the liability of all investment decisions reside with the individual. Investors should always do their own due diligence and fact check all research prior to making any investment decisions. Any direct engagements with readers should always be viewed as hypothetical examples or simple exchanges of opinion as nothing is ever classified as “advice” in any sense of the word.
Disclosure: I/we have a beneficial long position in the shares of RIO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.