RIO - Rio Tinto

Doesn't look like there's a thread on Rio Tinto, So i'll start one.

I've posted my analysis for Rio Tinto Here. Citigroup and UBS has recently bumped up their share price target to $100 for RIO.

RIO TINTO

Rio is really starting to band out any other people in here trade RIO?

Current Price $199.11
Code RTP
Yield 1.6%
Market Capitalization $70493.4
TCI Price Target $91.00 to $122.95
Investment Sector Basic Materials
Price Earnings Ratio 13.1
Recommendation Watch List

Price Chart here

INDUSTRY STATISTICS

Description
1 Day Price
Change %
Market
Cap
P/E
ROE %
Div. Yield %
Long-Term Debt to
Equity
Price to
Book Value
Net
Profit Margin % Price to
Free Cash Flow More
Info
Sector: Basic Materials 0.78 4268.0B 15.09 23.90 2.32 0.46 3.79 11.11 -102.47 N/A
Industries
Agricultural Chemicals
-1.68 54.3B 34.10 9.70 2.62 0.49 4.50 3.70 -27.90 More Info

Aluminum
2.32 55.1B 21.10 10.40 2.03 0.94 3.93 4.40 -109.80 More Info

Chemicals - Major Diversified
0.44 154.9B 12.20 27.30 2.82 0.95 5.15 8.80 -64.30 More Info

Copper
-0.67 38.5B 10.30 42.00 5.65 0.34 4.29 22.10 -62.40 More Info

Gold
0.14 198.8B 32.00 11.00 0.98 0.27 4.18 12.00 428.30 More Info

Independent Oil & Gas
1.08 546.5B 11.20 26.50 1.58 0.41 3.12 17.20 -118.30 More Info

Industrial Metals & Minerals
0.84 367.3B 15.60 32.60 1.45 0.51 5.26 16.70 -87.00 More Info

Major Integrated Oil & Gas
0.81 1368.5B 11.60 25.40 3.13 0.28 3.30 8.80 100.50 More Info

Nonmetallic Mineral Mining
0.69 12.3B 24.60 23.90 1.28 0.81 4.68 14.20 -67.70 More Info

Oil & Gas Drilling & Exploration
0.68 252.9B 17.40 17.20 1.48 0.38 3.15 15.90 23.80 More Info

Oil & Gas Equipment & Services
1.17 246.6B 22.10 22.20 0.97 0.57 7.12 12.10 -2370.50 More Info

Oil & Gas Pipelines
0.63 130.8B 24.20 15.00 3.13 1.36 3.42 4.90 -98.10 More Info

Oil & Gas Refining & Marketing
0.66 480.0B 11.20 24.10 2.68 0.30 2.99 7.60 246.10 More Info

Silver
0.37 6.7B 0.00 0.00 0.00 0.51 5.01 -15.10 -25.20 More Info

Specialty Chemicals
0.60 51.0B 31.60 8.30 2.34 1.64 4.19 3.00 -97.80 More Info

Steel & Iron
1.34 209.4B 10.50 31.00 1.85 0.51 3.15 13.90 -403.20 More Info

Synthetics
0.33 94.4B 26.70 11.50 2.95 1.08 3.79 3.80 213.40 More Info




Rio Tinto has business interests to a greater or lesser degree within the sectors listed above. All have a link to resources, which are currently from a price perspective in a strong bull market. As resources, or commodities are highly cyclical within their prices, buying resource producers at cyclical high commodity prices, can be fraught with peril.

From Rio’s own analysis, the following price history is illuminating;

Alumina
Low price $250
Current price $420

Aluminum
Low price $55
Current price $90

Coking Coal
Low Price $45
Current price $130

Thermal Coal
Low price $35
Current price $55

Copper
Low price $75
Current price $160


Diamonds
Low price $150
Current price $200

Gold
Low price $350
Current price $550

Iron Ore
Low price $35
Current price $80

Iron Pellets
Low price $45
Current price $120

Molybdenum
Low price $5
Current $30

Silver
Low price $5
Current $7

The *low prices* are actually quite close to the average price. Based on the current prices, it would seem prudent to allow some leeway for prices closer to average prices, which tend toward the low end of the scale. Commodity prices have always been cyclical. The argument currently being put forward for *permanently high prices* is the durability and strength of economic growth in China & India.


CAPITALIZATION

Market Cap (intraday): 67.41B
Enterprise Value (28-Jun-06) 70.25B
Trailing P/E 13.06
Forward P/E 9.27
PEG Ratio 0.78
Price/Sales 3.62
Price/Book 4.61


The Capitalization structure is predominantly common stock. The Bond and Bank debt are currently negligible.


INCOME STATEMENT

Profitability
Profit Margin 27.40%
Operating Margin 34.05%


Management Effectiveness
Return on Assets 16.27%
Return on Equity 38.88%



On the basis of this exhibit, the evidence would suggest an extremely attractive stock to own.
Unfortunately, it is a little misleading.

The ratio that highlights the problem is the *Return on Assets* Rio is only generating $0.81 of revenue per $1.00 of assets. This is indicative of a low return and capital intensive business.

The extremely attractive profit margins are attained in two rather important ways;
*The first are that profits generated are via, production + price received.
Production has been relatively static. Revenues have grown at 18.5% compounded.
Net Profits have grown by 37.0% compounded. Where is the disconnect?

Cost of Goods reveals the anomaly. This cost had to be backed out as the figures were not available. In essence Cost of Goods has remained within the compounded average growth of 14% and due to GAAP accounting, utilizing FIFO the rising prices available have had an impact on earnings via the large inventories that are kept on the Balance Sheet.



The ratio of Inventories to Revenues highlights the aggregate high Inventory levels [1.49]
Combined with Cost of Goods to Revenues [0.51] on aggregate, to the current ratio [0.38] Cost of goods has fallen, in part to the Inventory levels on hand, and thus through FIFO reporting has swelled the earnings dramatically.

Are these earnings sustainable?
We are really back to where we came in. Are the current high prices for commodities sustainable? Will China & India continue their extreme growth rates? Can Rio put off a rising cost of production, if so, for how long?


BALANCE SHEET

There has been no Balance Sheet provided, therefore, many of the figures have been provided from past Balance Sheets, and some figures backed out.
Rio Tinto has a weak cash position. Much of the Working Capital has been tied up within high Inventory levels. This has currently worked out very well, but, in times of weaker pricing, the effect can be the opposite.

The solution has been in the past to take short-term Bank borrowing. This is not really a major problem in regards to ultimate survival, but it impacts the cash-flows, reducing earnings per share via increased interest payments.

Capital Expenditures reveal a very high level of “property trading”. The huge number of transactions revolving around acquisitions and disbursements raise questions, but provide no answers.

Dividend policy has been somewhat stingy, with a 21% payout ratio. This is a very high Capital intensive business, therefore, with a low dividend payout ratio, have management utilized retained earnings in a productive manner for the owners?

On first blush, you would have to say yes, current figures suggest a 21% return on retained earnings.
This has been accomplished on twenty-five year high commodity prices. What has been the average return?
It has been 7.5%. This is low. It is also consistent with the low return on assets.

SUMMARY

Is this a solid business………………….yes it is.
Is this business likely to go bankrupt……………..no, it is not.
Is it fairly valued at current prices……………..no it is overvalued.

The intrinsic value is calculated at a range of $91.00 to $122.95
At a current price of $199.11 it is some 61% overvalued. If it could be purchased within the low $70 range, it would provide an excellent investment opportunity.

The above prices and valuations are based on US$ ADR values.
Sorry about the first table, didn't post well.

jog on
d998

Ducati, thanks for taking the time to post your analysis. It is incredibly thorough and a very entertaining, informative read. I look forward to reading more of it.

Thanks!

No problem Doc.
Glad you enjoyed it.

jog on
d998

ducati916 said:

The intrinsic value is calculated at a range of $91.00 to $122.95
At a current price of $199.11 it is some 61% overvalued. If it could be purchased within the low $70 range, it would provide an excellent investment opportunity.

Click to expand...

Oh God, not again!!

You are saying RIO is valued at nearly 3 times what it should be.


What companies do you reckon people should buy? please publish at least one name, it must be the bloody bargain of the century if you see it is fairly valued.

he he, I wonder what RIOs p/e would be at the lower value range? 1.5?

RAOTFLMFHO!

kennas said:

he he, I wonder what RIOs p/e would be at the lower value range? 1.5?

RAOTFLMFHO!

Click to expand...

If someone can please point me to a large world leading company that consistently makes profits, has a good outlook, no major problems and has a P/E ratio of 2 - I will sell my kidneys, my car, my mother, and my life savings and punt them all into that company.

I'll be richer than Buffett in a year or two.

Anyone know of one?

RIO looks like it's about to take another plunge in this wave C in Elliott speak, most good EW people would be able to see this (which is not the same as saying it's a certainty), also a gap fill expected on the retest of the breakdown that many would be watching (ignoring the common gaps)....a fair way to go before it reaches Duc's buy targets, don't think it'll get there imo but $55-60 (ASX listed price) looks within reach, the targets are guidelines only.

Any alternative chartists' opinions out there? H&S, symmetrical/descending triangle measures, breach of multiple trendlines, high volume selling etc can add to the bearish picture...

RichKid said:

RIO looks like it's about to take another plunge in this wave C in Elliott speak, most good EW people would be able to see this (which is not the same as saying it's a certainty), also a gap fill expected on the retest of the breakdown that many would be watching (ignoring the common gaps)....a fair way to go before it reaches Duc's buy targets, don't think it'll get there imo but $55-60 (ASX listed price) looks within reach, the targets are guidelines only.

Any alternative chartists' opinions out there? H&S, symmetrical/descending triangle measures, breach of multiple trendlines, high volume selling etc can add to the bearish picture...

Click to expand...

$60 looks like next support level. Pretty crummy chart. Hard to pick anything really. Broken down out of decending triangle last week I suppose.

Interesting that broker concensus (from 9 brokers) has this as a buy/outperform with an average $96 price target!

is rio going into another spree.

Who thinks its heading to all time highs.

Just when people thought it was dropping just kicks back

$75.50

will rio and bhp send the market to all highs again by xmas.

i think so.... i am guessing RIO to be well over $80 by xmas.

Ken said:

$75.50

will rio and bhp send the market to all highs again by xmas.

Click to expand...

By xmas?

It could be by 10:08am tomorrow!!

Rio has a limited growth profile and is therefore at the mercy of commodities prices. Not really too bad a thing though...

Copper (51%) - way above analyst's conservative (but rising) expectations

Iron Ore (24%) - remaining tight and rollover of massive prices still expected

Aluminium - (9%) spot still above most analysts forecasts

Coal - (9%) ditto

BHP is better but RIO is still a cracking buy - regardless of the hopelessly wrong wave count voodoo

RIO suffered from the unwinding of the RIOSIDE BHP-clone trade (RIO/WPL as a parcel) and remains very cheap

I (and a lot of market players) wish RIO would FIRE UP and buy some more assets for growth.

If they do not get bigger they will become a target. Trading at less than 10 times with no debt.

Someone needs to gear this thing up.


Oh, and does it amaze anybody else that rubbish like CDU, PMH, CGT, MOX (Dog **** Mining etal) can get 100's of posts and RIO is still at sub 100?

BSD said:

R....regardless of the hopelessly wrong wave count voodoo....

Click to expand...

BSD,

Give it a miss will you? That is a very acrimonious comment and is not necessary.

Thanks

Sorry if it is offensive - at least I didn't swear this time


But surely an alternative view is required sometimes and I am happy to live by my opinions. I certainly get paid from them.

Shorting RIO at $66 (three days before the bottom) due to using a narrow method I believe is voodoo lost lots of money. Shorting RIO on a questionable fundamental analysis like Ducati's, in my view, is also not going to make money.

. My disagreement has nothing to do with fundamental versus technical

Plenty of funny stuff goes unquestioned on the forum and I would like to provide an alternative view point. Plenty of people also get bagged on here for various ideas - particularly those requiring the opening of a quartely production report or buying a company that actually has earnings.

Go to the CDU thread and check out some of the really well researched and backed-up rubbish I have been exposed too. I got called a commie FFS!

Nobody gets it right all the time and hindsight is 100% but an alternative view should always be accepted. My points of view during the time in question are as public as the next guy's. Sometimes I think that if you learnt all you know about stocks from this forum you wouldn't have a stock in your portfolio that actually made money.

If someone wants to say that buying BHP and RIO at 9 times earnings is foolish when they are cum-upgrades is voodoo or rubbish or dumb or silly I am happy to hear why. You and me have had some excellent discussions...

I am not so precious to be concerned by someone disagreeing with me. I think I learn more by being in discussions where not everyone is thinking the same.

Is RIO still going to $50?

If not - why not and what has changed since Sept apart from the chart?

BSD said:

Sorry if it is offensive - at least I didn't swear this time


But surely an alternative view is required sometimes and I am happy to live by my opinions. I certainly get paid from them.

Shorting RIO at $66 (three days before the bottom) due to using a narrow method I believe is voodoo lost lots of money. Shorting RIO on a questionable fundamental analysis like Ducati's, in my view, is also not going to make money.

. My disagreement has nothing to do with fundamental versus technical

Plenty of funny stuff goes unquestioned on the forum and I would like to provide an alternative view point. Plenty of people also get bagged on here for various ideas - particularly those requiring the opening of a quartely production report or buying a company that actually has earnings.

Go to the CDU thread and check out some of the really well researched and backed-up rubbish I have been exposed too. I got called a commie FFS!

Nobody gets it right all the time and hindsight is 100% but an alternative view should always be accepted. My points of view during the time in question are as public as the next guy's. Sometimes I think that if you learnt all you know about stocks from this forum you wouldn't have a stock in your portfolio that actually made money.

If someone wants to say that buying BHP and RIO at 9 times earnings is foolish when they are cum-upgrades is voodoo or rubbish or dumb or silly I am happy to hear why. You and me have had some excellent discussions...

I am not so precious to be concerned by someone disagreeing with me. I think I learn more by being in discussions where not everyone is thinking the same.

Is RIO still going to $50?

If not - why not and what has changed since Sept apart from the chart?

Click to expand...

BSD,

Your opinion is always researched, well thought out and should be valued for what it is. Your opinion should stand by that, and doesn't require the disparagement of other methods of analysis which you admitted to not understanding.

Let us consider two shops next door to each other. Lets use furniture because thats the industry I come from.

One shop sells a 5 piece lounge suite with lamps and a coffee table thrown in for $599. Yet next door at the other shop, $599 wouldn't even buy half a chair. That shop sells a 3 piece lounge suite for $8,995.

Both shop owners drive home to the leafy suburbs in their merc 560 and kids go to private schools etc etc.

I need not continue on because how each makes money is quite obvious.

This lesson may seem overly elementary to someone who is obviously employed as some sort of analyst or something. But it seems to have been a lesson lost on you. Both approaches are valid and both make money, yet they are philosophically poles apart.

So it is with trading/investing. Different philosophies using the very same instrument. How about that, yet both make money.

We must assume then that disparaging remarks such as "voodoo", "questionable analysis" etc is nothing more than philosophical snobberey. It is totally unwarranted, and as I said, you analysis stands up without it.

You can be a great role model for others who feel they must use this sort of rubbish to reinforce substandard analysis. Those of us who know better, should set the tone.

Thanks

BSD said:

Oh, and does it amaze anybody else that rubbish like CDU, PMH, CGT, MOX (Dog **** Mining etal) can get 100's of posts and RIO is still at sub 100?

Click to expand...

Oi watch what you say about PMH!!

RIO is worth $34B
PMH is worth $43M

Which one is more likely to triple in value first?

which one is more likely to halve first...