Analysis of Corporate Financial Information 02/12/15

GROUP 18Xue Chen / Yuqi Tang / Panas Panagiotis / Yungho Chen

( )

Founded 1873 Global multiple resources

company World no.3 aluminum

company World no.2 iron ore

company

Coal, 4308

Iron ore, 23281

Diamonds, 4150

Copper, 6282

Aluminium, 12123

INTRODUCTION

Like many major mining companies, the Rio Tinto Group has historically grown through a series of mergers and demergers

Analysis of Corporate Financial Information 02/12/15

ValuationGrowth

Opportunity

Cash FlowProfitability

SELL

Analysis of Corporate Financial Information 02/12/15

Profitability

PanasPanagiotis

Common strategy: portfolio diversification

Differentiation with its competitors Low cost production

Capture demand from smaller players in the market

Difficult to compete lower prices

Is the strategy successful in terms of

profitability?

STRATEGY

-30

-20

-10

0

10

20

30

40

2011 2012 2013 2014

Turnover Ratio

RioTinto BHP Vale Anglo Anerican

Key features:

Volatility

Not consistent

growth rate

CHANGE IN TURNOVER

0

20,000

40,000

60,000

80,000

2010 2011 2012 2013 2014U

S$M

Revenues & EBITDA

Revenues EBITDA

Key features:

Large drop in 2012 Decline in Revenues Increase in EBITDA

PROFITABILITY REVENUE & EBITDA

Strategy seems successful

0

5,000

10,000

15,000

20,000

25,000

Al Co D&M Energy Ore

US$

M

Revenues

2013 2014

0

4,000

8,000

12,000

16,000

Al Co D&M Energy Ore

US$

M

EBITDA

2013 2014

Aluminium, Copper, Diamonds & Minerals Energy, Iron

PROFITABILITY BY SEGMENTS

Iron ore: main component (54%) The Chinese Economy is slowing down Decrease in demand

Drop in Commodities prices (volatility)

MAIN PROBLEMS

-15

-10

-5

0

5

10

15

20

25

30

2011 2012 2013 2014 2015

ROA

Rio Tinto BHP Vale Anglo American-30

-20

-10

0

10

20

30

40

50

2011 2012 2013 2014 2015

ROE

Rio Tinto BHP Vale Anglo American

Rio Tinto performs better than its main competitors

PROFITABILITY COMPARISON

Analysis of Corporate Financial Information 02/12/15

Cash Flow

YuqiTang

2012 2013 2014

Rio Tinto BHP Billiton Vale Anglo American

US$ billion

LargeA

mo

un

t -8,185

2,077

6,124

High volatility

STRATEGY: CAPEX⬇️, Cash Returns to shareholders⬆️, Strong Balance Sheet

FREE CASH FLOW

2012 2013 2014

Rio Tinto BHP Billiton Vale Anglo American

Net OCFUS$ billion

14,286

3,905

9,430

25,364

12,807

2012 2013 2014

Rio Tinto BHP Billiton Vale Anglo American

CAPEXUS$ billion

8,162

3,918

17,61515,704

11,813

FREE CASH FLOW SOURCES

2011 2012 2013 2014

Dividends declared

US cents per share

145

167

192

215

Payout Ratio 2011 2012 2013 2014

Rio Tinto 0.39 0.00 0.89 0.58

BHP Billiton 0.21 0.38 0.54 0.46

Vale 0.01 0.29 1.19 1.06

>98%

Sustain

able sh

areho

lde

r return

s

2010 2011 2012 2013 2014

EPS

DPS

Stable dividend policy Struggle to seize shareholder

15%

15%

12%

FREE CASH FLOW DIVIDEND

Strong solvency now but still a threat in the future Giving up the potential financing opportunity

FREE CASH FLOW LOAN REPAYMENT

2011 2012 2013 2014 2015

ROA 5.02% -2.54% 3.19% 5.96%

?ICF -0.73% -0.41% -0.78% -1.05%

Spread 4.29% -2.95% 2.41% 4.91%

ProjectIRR>15%

Lessopportunity

Increase EPS Stable the Stock Price ?

SELL

FREE CASH FLOW BUY-BACK

Analysis of Corporate Financial Information 02/12/15

GrowthOpportunity

YunghoChen

0%

10%

20%

30%

40%

50%

60%

Rio Tinto BHP Vale

Iron ore

Aluminium

Diamond

Iron ore

Iron ore

Petroleum

Coal Fertilizernutrients

Copper

Diversification in products

STRATEGY

2015 first half

2014 first half

Revenue 7,573 12,596

Net earnings 2,099 4,683

Profit ratio 28% 37%

Total production(Million tonnes)

123.3 109.9

Steel productionDeveloping countriesChina

Who needs iron ore?

IRON ORE

7%

DEMAND

Supply will go down to meet demand?

NO!

IRON ORE SUPPLY

20

05

20

09

Fierce supply competitionMaximize productionCost advantage in the industry

“The big three---Rio, BHP and Vale, are killing a decade-long commodities by oversupplying the market”

“Our analysis indicates there are 32 competitive projects that could be incentivized if we were to withhold volume”

IRON ORE

2015 first half 2014 first half

Revenue 5,455 5,752

Net earnings 793 373

Profit ratio 14.5% 6.5%

Total production(Thousand tonnes)

21,179 20,188

ALUMINIUM

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

0

20000

40000

60000

2011 2012 2013 2014

Total ConsumptionTotal ProductionRio Tinto Production

ALUMINIUM

10.00%

12.00%

14.00%

16.00%

18.00%

2011 2012 2013 2014

UC Rusal

Chalco

Rio Tinto

Hongqiao

10.00%

12.00%

14.00%

16.00%

18.00%

2011 2012 2013 2014

UC Rusal

Chalco

Rio Tinto

Hongqiao

Alcoa

Why?

65% Value-added products

Analysis of Corporate Financial Information 02/12/15

Valuation

XueChen

Source: Morningstar Financials

Period end:31/12/2014

Market Cap(USD, Millions)

Enterprise Value(USD, Millions)

Rio Tinto 85,724 106,672

Ratios Rio Tinto BHP ValeAnglo

AmericanMEAN

Adjusted Value

Difference

Price/Earnings 13.9 9.1 NEG NEG 11.5 70922.7 -14801.3

Price/Book 1.8 1.6 1.1 0.8 1.3 63102.4 -22621.6

EV/EBITDA 8.8 6.2 NEG NEG 7.5 73428.7 -12295.3

EV/Sales 2.1 2.5 2.1 1.2 2.0 79355.4 -6368.6

Market Cap 85724

VALUATION RATIO ANALYSIS

-4

-2

0

2

4

6

8

2010 2011 2012 2013 2014

Dividend per share Earning per share

VALUATION

-6

-4

-2

0

2

4

6

8

10

2010 2011 2012 2013 2014

Free Cash Flow per share

Negative free cash flow

Not suitable for DCF model

EPS negative & Dividend keeps increasing

Satisfy shareholders

Dividend payout ratio too high

Dividend may not be sustainable

Not suitable for DDM model

Source: Morningstar Financials

Source:www.gurufocus.com

VALUATION Residual Earnings Model

Year Equity Equity Charge

Net Income

Residual Income

RI per share

Discounted RI

2010 58333 4707.47 14238 9530.53 4.83 4.33

2011 52199 4212.46 5835 1622.54 0.84 0.67

2012 46553 3756.83 -3028 -6784.83 -3.67 -2.65

2013 45886 3703.00 3665 -38.00 -0.02 -0.01

2014 46285 3735.20 6527 2791.80 1.50 0.87

SUM of Discounted RI 3.22

Cost of Equity=8.07% WACC=11.46% BV=20.52

P=20.52+3.22=23.74 < Share Price 33.40

Difference:higher expectation for the company

Source:www.gurufocus.com

VALUATION

Price Calculated Share Price percentage

RIO TINTO 23.74 33.40 71.07%

BHP 24.17 27.31 88.49%

Vale 11.97 3.36 356.30%

Anglo American 102.07 197.32 51.73%

Mean of percentage (exclude Vale) 70.43%

Vale: book value per share dropped significantly

Whole industry: overvalued

Rio Tinto: perform normally among the industry

Doubts on future profitability because of Chinese economy

Lack investment opportunities

Poor use of money

Large impairment charges

Fail to capture incremental aluminiumdemand in the market

Overvalued on share price

Sell

CONCLUSION

THANK YOU