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Rio Tinto - plans to acquire full ownership of Turquoise Hill

Rio Tinto has made an all-cash proposal to acquire the remaining shares in Canadian mining company Turquoise Hill...

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Rio Tinto has made an all-cash proposal to acquire the remaining shares in Canadian mining company Turquoise Hill, where the group currently has a 51% stake. The deal values the remaining shares at $2.7bn, a 32% premium to the last closing price.

Turquoise Hill's main asset is a 66% stake in the Mongolian Oyu Tolgoi copper-gold mine, with the remaining 34% owned by the Mongolian Government.

Rio Tinto CEO, Jakob Stausholm, said: ''The Proposed Transaction would enable Rio Tinto to work directly with the Government of Mongolia to move the Oyu Tolgoi project forward with a simpler and more efficient ownership and governance structure.''

Any deal will be subject to approval by Turquoise Hill shareholders and regulators.

The shares fell 3.3% following the announcement.

View the latest Rio Tinto share price and how to deal

Our view

Record profits and ballooning shareholder returns cap off a year where we've seen Rio capitalise on booming commodity prices and shift focus to commodities that support decarbonisation. Wasting no time, the group's proposed Turquoise Hill deal would boost its stake in what's expected to be one of the biggest copper mines in the world when complete.

But for now at least, iron ore is really what it's all about - accounting for just under three quarters of underlying cash profits last year. That worked pretty well for the group - with strong Chinese demand, government stimulus and supply constraints causing a significant spike iron ore prices and ultimately boosting profits.

Despite production costs at the flagship Pilbara iron ore mines expected to rise to $19.5-20.0 a tonne, Rio has the potential to produce at incredibly low costs. Average market prices were $142.8 per a tonne during the last year. Digging up some dirt and selling it for seven times what it costs is an attractive proposition by anyone's standards and offers a good chunk of protection should prices come down.

Of course, sensitivity to commodity prices is a curse as well as a blessing. When prices collapsed in 2015/16 as demand from key growth markets like China dried up, Rio was forced to embark on a brutal cost cutting exercise.

That legacy cost cutting served the group well and provided the platform for free cash flow to blossom as commodity prices recovered. That's paved the way for nearly three quarters of profits being returned to investors over the past 6 years. Despite paying out $15.4bn in dividends last year, the group impressively ended with a net cash position.

That provides the framework to go out and spend on the new de-carbonisation strategy. The group's due to acquire an $825m lithium business and plans to spend $2.7bn increasing its ownership in the Mongolian Oyu Tolgoi copper-gold mine. But as we're seeing in Serbia, bringing new projects online is no easy feat. $2.4bn was committed to the Jadar lithium-borate project, but the Serbian government pulled approval in January.

With a healthy balance sheet, further acquisitions can't be ruled out. But with commodity prices relatively high, they'll likely be targeting tactical projects like the recent two as opposed to anything on larger scale.

Ultimately, it's difficult if not impossible to say with any degree of certainty which direction commodities will take. Despite miners typically being a good hedge for an inflationary environment, they aren't immune to input cost rises which weigh on margins. The good news is Rio's balance sheet and low base costs give it the firepower to invest in growth should opportunities arise and the resilience to help weather a downturn. Since Rio aims to pay out around half of earnings as a dividend every year, commodity prices will be crucial for shareholder returns. Though remember, nothing is guaranteed.

Rio Tinto key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results (23 February 2022)

Full year revenue rose 42% to $63.5bn as the recovery of global economies pushed major commodity prices higher, particularly iron ore. Underlying cash profit (EBITDA) of $37.7bn was 58% higher than the previous year.

The board announced a final dividend of $4.17, along with a special dividend of $0.62. That brings the total full-year dividend to $10.4, 79% of underlying earnings.

Iron Ore revenue rose 44% to $39.6bn, largely driven by a 45% increase in the price of iron ore to $142.8 per tonne and an increase in sales in China. That fed into underlying cash profits of $27.6bn, up 46%. The largest mine, Pilbara, saw costs rise quicker than expected and production was down 3% due to poor weather and project delays.

Aluminium revenue rose 36% to $12.7bn, as the price of aluminium rose 49% off the back of increased global demand. Lower Bauxite production due to bad weather and cost inflation were detractors, but underlying cash profits more than doubled to $4.4bn.

Copper revenue grew 58% to $7.8bn. That was again driven by higher selling prices, up 50%, due to supply constraints and increased speculative interest. Rising costs at the Escondida mine were offset by higher sales volumes elsewhere and overall copper unit costs fell 26%. Underlying cash profits grew 90% to $4.0bn.

In Minerals, a robust construction market and recovery in diamond prices meant revenue grew 25% to $6.5bn. Higher prices more than offset declining volumes and underlying cash profits grew 52% to $2.6bn.

Free cash flow of $17.7bn was 88% up on the previous year despite a 19% rise in capital expenditure to $7.4bn, largely due to higher profits.

$15.4bn in shareholder returns partly offset the free cash flow, meaning the group ended with a net cash position of $1.6bn - compared to net debt of $0.7 at the start of the year.

2022 capital expenditure is expected to be around $8bn. Unit costs for both iron ore and copper are expected to rise due to increased labour and input costs.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Senior Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 14th March 2022