Rio Tinto plc Ordinary 10p (RIO)

Company overview

The core activity is the exploration and extraction of minerals, primarily in Australia and North America, with each accounting for about 40pc of the Group's total assets. The group also conducts business in around 40 other countries. Products mined include copper, gold, iron ore, coal, aluminium, diamonds, zinc, lead, silver, nickel, salt, tin and uranium.

HL Update (14 February 2008)

BHP Billiton recently raised its takeover offer (+13pc) for Rio (06Feb08), placing an immense price tag on the table of over $147 billion. However, not only has Rio so far rejected the bid, but Chinese mining group Aluminium Corporation of China (known as Chinalco) and US mining mammoth Alcoa have further complicated the issue by taking a 12.9pc stake in Rio. Furthermore, management at Rio are rejecting the bid on valuation grounds. Rio’s own recent full year results (13Feb08) saw the group posting better than expected results, with the company’s 2007 net profit falling by 2pc to $7.312 billion, but beating the $7.1 billion consensus forecast. A combination of rising costs, volatile exchange rate movements and costs incurred in connection with the relatively recent takeover of Canadian aluminium giant Alcan provided the downside. On balance, with the shares having already advanced by a substantial 95pc plus over the last 12 months, offset against a raised takeover bid from BHP Billiton, market consensus opinion is currently neutral in tone.

Previous HL Update (9 November 2007)

There is an old saying in markets ‘no smoke without fire’. Although rumour had been circulating for sometime, early November (2007) has seen the world’s largest mining company, BHP Billiton, come clean and confirm that it has made a takeover/merger offer for fellow mining giant Rio Tinto. However, despite Rio shares enjoying a 20pc gain on the day of the confirmed approach, the all share offer from BHP has for now been rejected, on the grounds that it undervalues Rio Tinto. Such a coming together of mining mammoths would establish a superpower in the fields of iron ore, coal and many base metals – a giant with increased negotiating power to deal with the vastly expanding Chinese economy. Furthermore, despite rapidly rising commodity prices in recent years, costs have also been increasing and a merger would potentially result in massive cost savings. On balance, regulatory considerations are likely to prove a feature, Rio has only just agreed the takeover of rival North American miner Alcan and the shares are now up over 70pc (as of 09Nov07) in just the last three months - market consensus opinion for Rio is currently neutral in tone.

HL Comment (7 August 2007)

‘Iron is the giant among metals’ notes a comment on the group’s website. It goes on to inform the reader that ‘Humankind uses 20 times more iron in the form of steel, which is iron combined with carbon from coal, than all the other major metals put together’. Considering that Rio Tinto is the world’s second largest producer of iron ore and a very big producer of coal and copper used in the electronic industries - in combination with the massive effect that China’s rapidly expanding economy is having on demand – it is clear why the group remains a giant of the industry.

Mid July 2007 saw the group take another step up in scale as management announced a 38 billion US dollar acquisition of Canadian mining group Alcan. The all share offer sees the combined group become the number one miner for aluminium throughout the world. Early August saw the group take a small step backwards, against the recent trend of strong commodity prices and rising profits. Underlying half year profits declined by 6pc to $3.53 billion, as rising industry costs saw the group taking an exceptional charge – partly currency related – against group profits. That said, revenues continued to rise and management remained confident in relation to the outlook. The acquisition of Alcan is likely to complete in the fourth quarter and non-core business assets are expected to be sold in order to part finance the deal.

Concerns focus on the continuation of global economic strength – particularly in the USA and China – along with rising production costs and foreign exchange volatility.  History proves that commodity prices are volatile and a sudden downturn in prices would prove detrimental. On the plus side, Rio continues to generate huge amounts of cash based on historically high commodity prices, much of which is being returned to shareholders. Furthermore, the Alcan acquisition should add to momentum going forward. On balance, current market consensus is tentatively positive.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st December 2004, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).