RIO has delivered a solid CY16 earnings result of US$5.1b. A highlight of the result was the increased shareholder returns, with RIO announcing a final dividend of US$1.25ps
Revenue of US$35b, EBIT of US$7.8b and DPS of US$1.70 placing the stock on 3.3% yield.
Looking out over 2017, we expect a relatively flat market for iron-ore prices which will translate into only moderate EPS gains for RIO (5-10%). We assume revenue of US$38b and EBIT at US$9.5b, EPS $3.20, DPS US$2.50, which will place the stock on a forward yield of 4%.
Share buy backs and capital returns will help underpin the story here with RIO.
We see both RIO and BHP fully valued at current prices. With short term volatility likely ahead for Iron-ore prices, we recommend taking profits or selling covered calls to enhance the yield.
On balance, 2016 wasn’t a bad year for RIO Tinto. After posting a 7-year low at $36.50 on February 1st, shares of the mining giant closed out the year just below the $60.00 mark (a 64% gain).
This impressive turn-around was supported by a broad rebound in Iron Ore, Copper, Coal and Aluminium. Rio has an impressive portfolio of assets. It anticipates solid growth in Iron Ore production in 2017, with a large copper project coming online over the next decade.
The company has a market cap of just under $80 billion.
On Tuesday, RIO will release its Q4 2016 production report. We expect the report to show a modest 1% lift in quarter-to-quarter production, driven primarily by Q4 strength in Iron Ore production and shipments from the Pilbara.
In addition, forecasts expect RIO to have lifted group production by 5% YoY in 2016, with strong gains in Copper (3%), Iron Ore (6%) and Aluminium (10%).
We also expect RIO to lift group production forecast by a further 7% for calendar year 2017.
In FY17, we expect revenue to up 5% to $37b, net profit up from $5.2b in FY16 to $7b in FY18. EPS will increase from $2.90 in FY16 to $4.00 in FY18, helping to push the dividend yield from the current 3% to almost 5% in 2018.
We’re keeping exposure to resources and selling tight covered calls 5% above current market valuations.
Copper prices jumped today as Chinese inflation data picked up last month, sending a reassuring signal about demand from the world’s largest consumer of industrial metals. China’s Producer Price Index rose 5.5% last month, which was better than the market expectation of 3.3%
The forward month red metal was up 2.9% at $2.60 per pound, posting its largest one-day gain in two months on the COMEX exchange in New York. A reduction in copper stocks at the LME will add short-term support to the upside for prices.
We expect to see firm resistance in the $2.74 area, which represents a “double top” chart pattern dating back to November.
A surprise jump in US inventory data extended the recent down move in crude oil prices. We now see solid support around the $50.00 level.
We still like the long side of oil names but feel investors should be adding covered call options to WPL and OSH to enhance the yield.
We’ve allowed upside to $27 in BHP and upside in RIO to $63 before capping out our short term gains.
Iron Ore prices continued its two month rally last Friday and trading close to the $80.00 per ton level for the first time in over two years. According to spot metals pricing, the benchmark 62% fine rose another 3.5% to 79.60 on Friday, extending its four-day rally to an impressive 13.2%.
The benchmark price has now gained over 82% so far in 2016, and has risen 108% from the all-time low of $38.30 per ton posted on December 11, 2015. The rally corresponds to the news that Chinese policymakers had managed to remove 88 million tons of steelmaking capacity across the country since the beginning of the year.
This has help trigger gains in steel prices, along with Iron Ore.
BHP and RIO have performed well, we look to keep exposure to these names and add to the cash flow through selling covered call options.
RIO’s 3Q16 production result was mixed. Copper production was weaker than expected & iron-ore shipments were broadly in line with market expectations. Thermal coal & coking coal delivered strong production numbers.
FY17 forecast revenue of $35b, EBIT of $5.5b, EPS $2.00 and DPS of $1.10, places the stock on a forward yield of almost 3%.
Starting at the top: Top line revenue flat, EBIT down 19%, dividend flat at $1.07 and trading on a 3.3% yield. Sell call options at $55 into November 16.
Note: 19th July – June quarter production numbers will be announced.
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Chart – BHP
