How Rio Tinto Can Weather the Volatile Commodity Market
New projects driving growth
Rio Tinto (RIO) is currently developing three growth projects:
- Oyu Tolgoi, its largest copper development project based in Mongolia, with an expected IRR (internal rate of return) of more than 20%
- Amrun, a bauxite project based in Australia, with an expected IRR greater than 20%
- Silvergrass, a high-grade iron ore project in Australia, with an expected IRR of more than 100%
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These three projects are low-cost and high-return projects that will likely drive Rio’s long-term profitability. They also give Rio an edge over mining companies with high-cost assets.
The increasing focus on high-quality assets has led mining companies (XME) such as Anglo American (AAUKY) and Glencore (GLNCY) to restructure their portfolios drastically. BHP Billiton’s (BHP) (BBL) assets are also high quality.
Cost-out and productivity programs
In a volatile commodity price environment, it’s very important to reduce costs to drive profitability. Rio Tinto has been doing exactly this. Since 2013, it has achieved cost savings of $8.2 billion, $2.1 billion of which is six months ahead of schedule.
Rio is meanwhile trying to improve the efficiency of its business through a productivity drive that aims to release $5.0 billion in cumulative FCF (free cash flow) over the next five years.
Positioning for volatile times
Most market participants believe that commodity prices—especially iron ore—could come under renewed pressure from increasing supply and weakening demand. Rio’s cost-cutting programs and capital expenditure flexibility should thus place it in a strong position for the volatile times ahead.
As Rio’s balance is restored in commodity markets in the medium to long term, the company could outperform its peers on the strength of its strong growth project pipeline, with costs that are expected to fall in the lower half of their respective industry cost curves.