When Rio announced third-quarter production figures from its Australian base overnight yesterday, the shares were marked up on solid performances across its mineral interests. Chief of these is iron ore from Pilbara in Western Australia, most of which goes to China and is therefore tied to that country’s economy and in particular its construction programmes. It did no harm that China’s central bank pumped £33 billion into its financial system this week in the hope of jump-starting a post-pandemic recovery.
Analysts at JP Morgan Chase said: “China steel demand has proven more resilient as infrastructure offsets poor property sector demand and excess output is finding its way to the export market.”
They expect iron ore prices to rise by 6 per cent this year, 13 per cent next year and 17 per cent in 2025.
Rio is the world’s second largest miner, after BHP, due to report this morning. It dates from 1873, when it bought the Rio Tinto mine in Spain, but a 1962 merger means that today its primary operating territory is Australia. It is also in another 40 countries. After lower iron prices drove down profits and dividends in the first half of this year, there was relief that in the July-September period iron ore prices rose while production and shipments held steady, with gains for bauxite, aluminium and copper and falls only for titanium dioxide slag and Canadian iron ore pellets.
Jakob Stausholm, chief executive, said: “We are making strong progress towards building the Rio Tinto of the future. We have more to do, towards sustainable performance improvements across our business.”
Perhaps the most ambitious project, at a likely $5.5 billion (£4.5 billion) cost, is Simandou, a remote region of Guinea near the west African coast. Its 2.3 billion tonnes of high-grade iron ore across two vast deposits could make Rio the world’s biggest miner of that metal. But its partners, the Guinea government and a Chinese consortium, appear to be piling more and more of the deal’s financial burden on to the company. This raises question marks over the financial return, especially as the scheme still requires regulatory approvals from competition authorities and government sign-offs from both Guinea and China.
As well as such political risks, the big mining groups face the constant prospect of environmental and reputational challenges. In 2020 Rio Tinto demolished a sacred cave in Juukan Gorge, Western Australia, dating back 46,000 years and believed to be the only inland site in Australia to show signs of continual human occupation since the last ice age. The company had to apologise and its then chief executive subsequently stepped down. Although such episodes normally have little operational impact, as they deter many investors and environmental funds they can affect the shares.
While iron will be Rio’s backbone for the foreseeable future, accounting for four fifths of group profits, it is making moves to go as green as a mining powerhouse can reasonably contemplate by targeting renewable technologies and new materials for the electric vehicle revolution. It has signed deals for recycled aluminium in North America and a joint copper exploration venture in Chile.
If it can sustain the third-quarter recovery into the remainder of the year, $9 a share underlying earnings should be possible for 2023, putting the shares on a prospective price-to-earnings ratio of 6.9. Since the management has a policy of paying out half the annual earnings, that would give a $4.50 dividend for a yield of 7.2 per cent. Those numbers reflect a considerable level of continuing risk, global and corporate, and are therefore no more than appropriate in these uncertain times.
ADVICE Hold
WHY A solid performer, but with a constant worrying dependence on events outside the company’s control
Vanquis Banking Group
Seldom does a share price rise on a warning that the company’s final dividend will be slashed, so it takes a convincing new strategy to make up the leeway. Vanquis shares rose yesterday after the new chief executive, Ian McLaughlin, set a 1p ceiling on the final dividend. Vanquis, in which I hold shares, has been in intensive care since the start of the pandemic, when its shares shed more than half their value and isolation shredded its traditional door-to-door lending strategy. To signal its new profile it changed its name to Vanquis seven months ago, from the indelibly tarnished Provident Financial.
This was always expected to be a hair-shirt year, with most of the transformation costs preceding the benefits. But, in the long tradition of new managements throwing everything including the kitchen sink into the dumper, McLaughlin has identified another £60 million cost savings and the analysts’ profit and earnings estimates have been scaled back accordingly for 2023 and the next couple of years.
The basic proposition has not changed: charge risky customers fees and interest rates high enough to more than outweigh those risks. The old model relied on local agents to assess likely defaulters. In August Vanquis bought Snoop, the financial planning app, to help customers but also to mine marketing information including assessing likely defaulters.
A high-interest credit card has been supplemented by vehicle finance, and that may lead to small-business lending.
The company expects to report £25 million-£30 million adjusted pre-tax profit for the full year, implying a second-half surplus of £31 million-£36 million. These numbers imply a 13.5 price-earnings ratio this year, falling to 3.7 in 2024 as cost savings flow through, and 2.6 estimated for 2025. Analysts think a 5.3 per cent dividend yield for this year will billow to 13.5 per cent and 15.2 per cent in the next two years. Payout rates of those dimensions usually mean a company is in trouble. In this case, it means the share price has not yet caught up.
ADVICE Buy
WHY The new management is getting a grip
