RIO – Rio Tinto | Aussie Stock Forums

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.