RIO_TINTO_LTD(RIO.AX)：CAPITAL_ALLOCATION_HELD_TO_ACCOUNT-2013-01-18.ppt

kaan peker,rio tinto ltd,1,2,deutsche bank markets research,rating buy australasia australia,company rio tinto ltd,date 17 january 2013 breaking news,m&m - diversified resources,reuters,bloomberg,exchange ticker,price at 17 jan 2013 price target - 12mth 52 week range (aud),64.60 81.90 72.30 - 48.63,rio.ax,rio au,asx,rio,all ordinaries,4,774,capital allocation held to account paul young research analyst,us$14b of writedowns - tom albanese and doug ritchie to leave rio. rio has announced it is impairing us$14b post tax with its 2012 results (us$10-11b aluminium, us$3b coal mozambique and 0.5b other). the frank release also announced that tom albanese and doug ritchie would be stepping down effective immediately, would not be taking 2012 or 2013 bonuses and would be forfeiting outstanding deferred bonuses. the board message to management is clear. “do not ask for investment capital unless you can deliver returns“. sam walsh (iron ore ceo) has been announced as ceo successor. somewhat long-awaited, this heralds the potential for a further improvement in capital allocation. we reiterate our buy rec. us$14b is a larger write-down than expected, but in line with valuation. rio announced in its november strategy review that year-end carrying value reviews would likely result in asset value revisions us$14b is more than expected so soon. us$10-11b from aluminium will lower its carrying value,(+61) 2 8258-2587 rob clifford research analyst (+44) 20 754-58339 research analyst (+61) 2 8258-1424 key changes,from us$30.5b to us$19b in line with our valuation of us$18.2b. while the writedown is big, it is worth remembering that the division contain include world class assets including alma, isal, qal, weipa and sohar among others. the us$3b coal mozambique writedown will bring this valuation to around,price target ebit margin (fye),82.80 to 81.90 19.6 to 22.2 ,-1.1% 13.2%,us$0.4b, under our previous us$1.3b valuation. we have extended the time line on this project based on the comments today (now us$0.37b).,price/price relative,a change in capital allocation strategy is a key catalyst. we have highlighted in a series of notes over the last 18 months the need for a change in the capital allocation strategy of the miners. todays rapid board response to a second misallocation of capital (riversdale after alcan) is the first step in this change in our view with very clear message that capital spending will be subject to increased scrutiny (the next step will be returning,90 80 70 60 50 40 1/11,7/11,1/12,7/12,the unspent capital to shareholders. sam walsh is a good ceo replacement in,our view; he is already on the board, and accountable for the largest part of,all ordinaries (rebased),rios earnings and growth. we expect him to deliver a series of positive announcements in coming months including; early delivery on iron ore growth, the oyu tolgoi ramp-up and details on the cost out program. valuation/risk,performance (%) absolute all ordinaries,1m 1.7 3.4,3m 15.3 4.9,12m -1.7 11.6,our valuation is set in-line with our a$81.9/sh (from 82.8/sh) npv (assumes a 9.0% wacc).key risks include weaker commodity prices and higher capex. forecasts and ratios,year end dec 31 net profit (usdm) eps (usd) % change per (x),2010a 13,901 7.07 0.0% 9.8,2011a 15,549 8.06 0.0% 9.8,2012e 8,804 4.74 0.0% 14.4,2013e 9,507 5.12 0.0% 13.3,2014e 10,751 5.79 -0.0% 11.8,source: deutsche bank estimates, company data pre-exceptionals/extraordinaries multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except p/b which uses the year end close _ deutsche bank ag/sydney deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,0,0,60,32,28,17 january 2013 m&m - diversified resources rio tinto ltd,model updated:17 january 2013,fiscal year end 31-dec,2009,2010,2011,2012e,2013e,2014e,running the numbers,financial summary,australasia australia m&m - diversified resources rio tinto ltd,db eps (usd) reported eps (usd) dps (usd) bvps (usd) valuation metrics price/sales (x),3.56 2.75 0.45 22.37 1.8,7.07 7.24 1.08 29.73 2.5,8.06 3.02 1.45 28.01 2.5,4.74 -2.40 1.53 21.68 2.5,5.12 5.12 1.61 25.12 2.2,5.79 5.79 1.73 29.17 2.1,reuters: rio.ax buy price (17 jan 13) target price 52 week range market cap (m),bloomberg: rio au aud 64.60 aud 81.90 aud 48.63 - 72.30 audm 119,643,p/e (db) (x) p/e (reported) (x) p/bv (x) fcf yield (%) dividend yield (%) ev/sales ev/ebitda ev/ebit,11.7 15.1 2.7 5.2 1.1 2.5 7.9 10.6,9.8 9.5 2.6 10.1 1.6 2.7 6.4 7.4,9.8 26.0 2.2 5.1 1.8 2.7 5.8 6.8,14.4 nm 3.1 nm 2.2 2.9 9.5 13.1,13.3 13.3 2.7 0.7 2.4 2.7 7.8 10.4,11.8 11.8 2.3 3.5 2.5 2.5 7.0 9.2,usdm 126,438,income statement (usdm),company profile rio tinto is a global diversified mining company with interests in aluminum, borax, coal, copper, diamonds, gold, iron ore, titanium dioxide feedstock, uranium and zinc. rio tintos key mining operations are located in australia, new zealand, south africa, south america, the united states, europe, and canada. rio tintos management structure is based primarily on six principal global products businesses aluminium, diamonds, copper, energy (coal and uranium), industrial minerals, and iron ore supported by worldwide exploration and technology groups price performance 90 80 70,sales ebitda ebit pre-tax profit net income cash flow (usdm) cash flow from operations net capex free cash flow equity raised/(bought back) dividends paid net inc/(dec) in borrowings other investing/financing cash flows net cash flow change in working capital,41,825 13,236 9,809 7,860 4,872 9,212 -5,388 3,824 14,877 -876 -16,420 1,643 3,105 234,55,171 23,767 20,330 20,491 14,238 18,191 -4,591 13,600 92 -1,754 -9,360 3,137 5,731 -185,60,537 28,182 24,365 13,214 5,826 20,030 -12,335 7,695 -5,504 -2,236 4,208 -4,441 -610 1,778,50,566 15,408 11,232 -1,881 -4,465 9,450 -14,164 -4,714 105 -3,017 3,904 327 -2,262 1,638,56,941 19,648 14,627 13,960 9,507 15,201 -14,351 850 -2,894 -3,000 1,000 -4,044 -370,60,209 21,934 16,577 15,869 10,751 17,765 -13,355 4,410 -3,067 -3,000 1,000 -658 -607,balance sheet (usdm),50 40 jan 11apr 11 jul 11 oct 11jan 12apr 12 jul 12 oct 12,cash and cash equivalents property, plant & equipment goodwill,4,233 45,803 14,268,9,948 56,024 15,296,9,670 64,967 8,187,6,269 68,372 3,246,2,226 76,702 3,246,1,568 83,700 3,246,rio tinto ltd margin trends 48 44 40 36,all ordinaries (rebased),other assets total assets debt other liabilities total liabilities total shareholders equity net debt,32,932 97,236 23,002 28,309 51,311 45,925 18,769,31,134 112,402 14,341 32,787 47,128 65,274 4,393,36,721 119,545 18,477 41,785 60,262 59,208 8,807,30,529 108,416 21,975 36,307 58,282 50,134 15,706,31,514 113,687 18,975 37,893 56,868 56,819 16,749,31,869 120,382 15,975 39,739 55,714 64,669 14,407,key company metrics,24 20,09,10,11,12e,13e,14e,sales growth (%) db eps growth (%),nm na,31.9 98.6,9.7 14.1,-16.5 -41.2,12.6 8.0,5.7 13.1,ebitda margin growth & profitability 40 30 20 10,ebit margin,30 25 20 15,payout ratio (%) ebitda margin (%) ebit margin (%) roe (%) net debt/equity (%) net interest cover (x),16.3 31.6 23.5 19.5 40.9 12.1,14.9 43.1 36.8 27.2 6.7 33.1,47.9 46.6 40.2 28.0 14.9 63.8,nm 30.5 22.2 19.0 31.3 63.7,31.4 34.5 25.7 21.9 29.5 54.8,29.7 36.4 27.5 21.4 22.3 53.8,0 -10,10 5,dupont analysis,-20,0,ebit margin (%),23.5,36.8,40.2,22.2,25.7,27.5,09,10,11,12e,13e,14e,x asset turnover (x),0.4,0.5,0.5,0.4,0.5,0.5,x financial cost ratio (x),0.9,1.0,1.0,1.0,1.0,1.0,solvency 50 40 30 20 10,sales growth (lhs),roe (rhs),70 60 50 40 30 20 10,x tax and other effects (x) = roa (post tax) (%) x financial leverage (x) = roe (%) annual growth (%) x nta/share (avg) (x) = reported eps annual growth (%),0.5 5.2 2.9 15.1 na 18.2 2.75 na,0.7 13.6 2.1 27.9 84.4 26.0 7.24 162.9,0.2 5.0 2.1 10.5 -62.3 28.7 3.02 -58.3,-0.4 -3.9 2.5 -9.6 na 24.9 -2.40 na,0.7 8.6 2.6 21.9 na 23.3 5.12 na,0.7 9.2 2.3 21.4 -2.5 27.1 5.79 13.1,0,0,source: company data, deutsche bank estimates,09,10,11,12e,13e,14e,net debt/equity (lhs) paul young +61 2 8258-2587 page 2,net interest cover (rhs) ,deutsche bank ag/sydney,17 january 2013 m&m - diversified resources rio tinto ltd figure 1: rio tinto operational and financial summary,fx/commodity assumptions audusd iron ore - lump (us$/t) - cif iron ore - fines (us$/t) - cif aluminium (us$/lb) copper (us$/lb) energy coal (us$/t) coking coal (us$/t) uranium (us$/lb) rutile (us$/t),cy10a 0.92 137 122 0.99 3.43 91 195 61 589,cy11a 1.03 181 168 1.09 4.00 122 289 63 1,045,cy12f 1.04 136 124 0.93 3.61 101 208 53 2,293,cy13f 1.04 137 125 0.96 3.69 94 178 65 1,300,cy14f 1.01 127 115 1.00 3.40 102 185 70 1,750,cy15f 0.97 122 110 1.00 3.29 100 180 68 1,900,cy16f 0.92 115 103 1.03 3.15 98 173 65 1,750,cy17f 0.87 107 95 1.07 3.01 98 165 63 1,300,cy18f 0.82 100 88 1.10 2.86 98 158 73 1,300,cy19f 0.80 106 92 1.17 3.17 99 176 75 1,522,cy20f 0.80 109 94 1.20 3.24 101 180 76 1,560,npv (hd12) aluminium (excl. pac al) copper diamonds minerals energy iron ore pacific aluminium investments corporate and other operations,us$m 14,035 20,437 2,558 17,496 7,708 86,531 4,126 4,000 (14,957),us$/sh 7.58 11.03 1.38 9.45 4.16 46.72 2.23 2.16 (8.08),aud/sh 9.13 13.74 1.66 11.38 5.01 56.29 2.68 2.60 (9.73),net debt,(16,749),(9.04),(10.90),key financial metrics,9403,10921,11211,12072,11593,11222,13733,14704 total,126,237,68.16,81.89,underlying earnings (us$m),16,112,15,888,11,245,9,507,10,751,10,665,11,582,11,380,10,969,13,421,14,671,operating cash flow (us$m),18,191,20,030,9,450,15,201,17,765,18,221,19,288,19,451,19,354,21,692,22,706 wacc (nominal),9.0%,shares,1,852m,capex (incl. exploration) and divestments (us$m) dividend (us$m) acquisitions (us$m) free cash flow (us$m) - before debt & equity net debt (us$m) gearing (nd/e - %) roe (%) roa (%),(804) (1,754) (907) 14,726 4,393 7% 36% 24%,(12,682) (2,236) (6,133) (1,021) 8,807 15% 31% 23%,(11,346) (3,017) (1,491) (6,404) 15,706 31% 27% 13%,(13,351) (2,894) - (1,044) 16,749 29% 25% 13%,(12,355) (3,067) - 2,342 14,407 22% 23% 14%,(12,493) (3,279) - 2,449 11,959 17% 21% 14%,(11,033) (3,446) - 4,809 7,150 8% 19% 14%,(9,491) (3,618) - 6,342 808 1% 16% 14%,(10,524) (3,799) - 5,031 (4,222) -4% 14% 13%,(9,842) (3,989) - 7,861 (12,084) -11% 16% 15%,(11,390) (4,188) - 7,127 (19,211) -16% valuation (hd12) 15% 16%,eps (usc) eps change (%),931 156%,897 -4%,685 -24%,578 -16%,636 10%,642 1%,689 7%,671 -3%,639 -5%,788 23%,857 9%,iron ore 57%,eps cagr (%) - off cy12 earnings,-16%,-4%,-2%,0%,0%,-1%,2%,3%,dps (usc) payout ratio (%),108 13%,145 17%,153 25%,161 31%,173 28%,181 32%,190 30%,200 33%,210 35%,220 30%,231 29%,production,energy,copper - refined (kt),393,334,279,303,303,295,295,295,295,295,295,5%,copper - mined (kt) iron ore (mt) - attributable iron ore (mt) - pilbara (100%) coal - hard & semi soft coking (mt) coal - thermal (mt),674 179 224 12.0 60.7,520 192 231 11.7 19.7,548 199 239 11.4 20.6,607 206 249 14.5 22.8,605 231 273 15.9 22.3,620 268 313 16.0 23.1,637 313 364 16.0 23.3,729 340 394 16.2 23.4,810 365 419 16.4 23.7,810 368 419 16.4 23.7,810 378 419 16.4 23.0,minerals 11% diamonds 2%,copper 13%,pacific aluminium 3% aluminium (excl. pac al) 9%,alumina (mt) aluminium (mt) uranium (kt) diamonds (mcts) gold (koz) titanium dioxide feedstock (kt),9.1 3.8 5.2 13.8 714 1,392,8.9 3.8 3.2 11.7 576 1,442,7.3 2.3 4.4 13.3 230 1,595,8.0 2.5 5.1 24.1 240 2,090,8.3 2.2 3.9 26.6 251 2,400,9.1 2.4 5.0 26.7 251 2,400,9.1 2.5 5.0 26.7 245 2,400,9.2 2.5 5.0 26.8 245 2,400,9.2 2.5 5.0 26.8 245 2,400,9.3 2.5 5.0 26.9 245 2,400,9.3 2.5 5.0 26.9 245 revenue split (2012f) 2,400,copper eq production (mt) copper eq cagr (%),7.4,7.0,7.0,7.6 8.0%,7.9 6.2%,8.6 7.2%,9.3 7.4%,9.8 7.0%,10.4 6.8%,10.5 5.9%,10.7 5.4%,energy 10%,revenue (us$m) aluminium copper diamonds minerals energy iron ore others (includes associates and jvs) total,15,206 7,782 682 2,353 5,652 24,024 877 56,576,15,582 7,634 727 2,493 7,327 29,909 -3,079 60,593,10,159 6,138 729 2,811 5,314 23,676 1,730 50,555,10,875 8,305 931 3,765 5,266 25,064 2,734 56,941,10,829 7,952 1,111 4,753 5,297 27,164 3,103 60,209,11,017 8,413 1,124 4,921 5,435 27,942 2,684 61,535,11,440 7,954 1,167 4,792 5,459 30,273 2,664 63,751,11,766 9,212 1,179 4,396 5,504 30,191 2,850 65,098,12,077 9,943 1,207 4,407 5,797 29,858 2,987 66,277,12,755 11,122 1,243 4,975 6,303 31,617 2,694 70,708,13,074 11,859 1,280 5,109 6,406 33,101 2,633 73,461,minerals 7% diamonds 2% copper 15%,aluminium,iron ore 46%,capex (us$m) growth,20%,aluminium copper diamonds,401 926 151,698 2,372 385,906 1,976 698,1,200 1,554 300,900 1,339 300,0 617 0,0 335 0,0 204 0,0 401 0,0 408 0,0 1,867 0 ebitda split (2012f),minerals energy iron ore total growth capex sustaining capex total capex,0 496 1,788 3,761 2,093 5,854,0 1,025 2,935 6,908 4,876 12,011,0 1,355 3,524 8,459 5,988 14,447,0 510 5,461 9,025 5,326 14,582,0 675 4,895 8,109 5,246 13,086,0 490 6,423 7,530 4,963 12,493,0 90 5,229 5,654 5,379 11,033,0 90 3,368 3,661 5,830 9,491,0 641 3,390 4,432 6,092 10,524,0 1,543 1,662 3,614 6,228 9,842,0 2,545 639 5,051 6,339 11,390,iron ore 74%,ebitda (us$m),aluminium,2,418,1,763,915,1,060,1,305,1,161,1,826,2,191,2,535,3,069,3,216,copper diamonds minerals energy iron ore others (includes associates and jvs),4,503 158 448 2,299 16,605 -453,3,394 180 523 2,232 20,930 -501,1,934 244 932 1,011 14,427 -983,3,652 435 1,420 623 14,473 -766,3,537 615 2,091 1,184 15,076 -757,4,228 615 2,296 1,526 15,006 -1,167,3,772 659 2,184 1,732 16,130 -1,197,4,439 672 1,848 1,850 15,608 -1,229,4,485 710 1,901 2,003 14,675 -1,261,5,311 740 2,406 2,367 15,931 -1,294,5,916 758 2,472 2,427 16,738 -1,328,energy 5% minerals 4.8% diamonds 1%,copper 10%,aluminium 5%,total,25,978,28,521,18,481,20,898,23,050,23,665,25,105,25,380,25,048,28,531,30,199,ebitda margins (%),aluminium copper diamonds,16% 58% 23%,11% 44% 25%,9% 32% 34%,10% 44% 47%,12% 44% 55%,11% 50% 55%,16% 47% 56%,19% 48% 57%,21% 45% 59%,24% 48% 60%,25% 50% 59%,minerals,energy iron ore total,41% 69% 46%,30% 70% 47%,19% 61% 37%,12% 58% 37%,22% 55% 38%,28% 54% 38%,32% 53% 39%,34% 52% 39%,35% 49% 38%,38% 50% 40%,38% 51% 41%,source: deutsche bank forecasts/estimates,deutsche bank ag/sydney,page 3,17 january 2013 m&m - diversified resources rio tinto ltd a big cut. to carrying value and the executive team the us$14b writedown includes us$10-11b for the aluminium division including pacific aluminium (which rio had stripped out of the division in order to commence a sale process). the writedown comes after a series of writedowns over the last 5 years shown in the table below. our estimated remaining carrying value for the division of us$19.5b is in line with our npv of 18.2b. we have not made any adjustments to our operating assumptions for the division as a result of todays announcement. figure 2: movement in aluminium carrying value,rio,alcan combined,2006,2006,2007,2008,2009,2010,2011,2012,rio tinto aluminium alcan,us$bn us$bn,3.6,20.7,4.1 20.7,book value goodwill capital expenditure depreciation operating assets,us$bn us$bn us$bn us$bn us$bn,3.6 0.2 0.3 3.6,20.7 20.7,24.8 19.1 0.6 -0.6 43.8,24.8 13.0 2.8 -1.9 35.7,22.6 13.0 1.7 -1.6 36.0,25.0 13.0 1.3 -1.6 38.3,23.1 5.9 2.7 -1.6 30.0,18.5 0.0 2.1 -1.1 19.5,asset sales,us$bn,-3.2,other adjustnments,us$bn,1.3,2.3,asset writedowns,us$bn,-6.1,-1.2,-8.9,-10.5,source: deutsche bank estimates/forecasts rio tinto completed its us$3.69bn acquisition of riversdale mining in july 2011. a us$3b writedown represents the majority of the carrying value and leaves an estimated carrying value of us$0.4b figure 3: movement in carrying value for mozambique coal,2011,2012,book value goodwill capital expenditure depreciation operating asset write down,us$bn us$bn us$bn us$bn us$bn us$bn,2.83 0.53 0.17 0.00 3.36,0.4 0.00 0.29 -0.01 0.65 -3.00,source: deutsche bank forecasts/estimates a key issue for rio appears to have been its desire to replicate its australian infrastructure in africa, this has not been possible in guinea with the simandou project and now appears not to be possible in mozambique the solutions are likely to be substantially smaller. as a result of this release, we have pushed our expectations for the mozambique development in next decade which has lowered our npv to us$0.37b.,page 4,deutsche bank ag/sydney,rd,17 january 2013 m&m - diversified resources rio tinto ltd re-cutting mozambique coal in our “the big 5” note dated the 23 of april 2012, we identified the development of mozambique as one of the big development projects for rio tinto. while we highlighted infrastructure development as a key risk, we took the view that the company would be able manage the issues. in todays announcement, the company states that this is not the case, specifically: “in mozambique, the development of infrastructure to support the coal assets is more challenging than rio tinto originally anticipated. rio tinto sought to transport coal by barge along the zambezi river, but this option did not receive formal approvals. these infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the rtcm tenements, have led to a reassessment of the overall scale and ramp up schedule of rtcm, and consequently to the impairment announced today.” we have now pushed our expectations for the project out 4 years with significant ramp- up not until next decade. a quick review of the project with significant capex due to be spent on perceived lower ri