Friday, 14 February 2014

Rio Tinto - nice numbers, well received...but gets tougher from here

I last wrote about Rio Tinto after their investment seminar in December (link here).  The message back then of capex cuts and focus on cash flow/dividends remains the core one as this chart from their FY presentation pack yesterday shows:

 
The share price has responded strongly to this public evolution of thought as shown by the below chart of the (US listed) stock performance.  So much for the opportunity of embracing market volatility by buying at c. US$45 as I postulated in December...
 
 
The actual earnings numbers did not surprise me particularly with the key metric being cash cost reductions outweighing (commodity) price declines. 

And the company continue to push this aspect, with a further uplift in cost control anticipated in 2014. 
 
So you can see the bull case...some rise in commodity prices/sentiment aligned with continued cost cutting and the opportunity of further progression of a 4.5% dividend yield...
 
What could knock this off course?  I thought this article from The Financial Times was of interest, given the importance of iron ore to Rio Tinto's earnings capabilities...and its inevitable link to Chinese growth prospects (surely the other big macro concern for the company).
 

 
My own views would be that there are good and bad points for Rio's shares from here.  A US$128bn EV ultimately needs higher earnings than delivered in FY13 but you cannot argue with the management's focus and the dividend yield.  The iron ore price and China/global growth hopes/fears will wax and wane accordingly.

What I found particularly interesting though was the relative outperformance of the stock versus peers such as Billiton (also a 4.5% yielder).  Using the London quote of the two companies, there has been a big switch in performance and preferences with Billiton, at least today, not being perceived as being quite as investor friendly given their on-going large energy sector capex projects, amongst others. 
 
 
 
From here I think that Rio's absolute and relative performance run is going to get tougher.  

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