In some respects, the past year has been a terrible one for Rio Tinto. The miner blew up two sacred rock shelters that were of the highest archaeological significance in Australia — and, with them, its reputation in the country that accounts for the lion’s share of production and profits.
The Juukan Gorge scandal cost Rio’s chief executive and two other executives their jobs and prompted its chairman to announce his early exit. Yet financial metrics tell a different story.
With China bouncing back from the pandemic, demand for iron ore, Rio’s core commodity, has been stronger than even Rio expected. Aided by supply disruptions and vaccine breakthroughs, iron ore prices rallied sharply through the back end of last year, hitting their highest in a decade in recent months.
Last month, Rio reported a 22 per cent rise in net earnings to $9.8 billion for 2020 and declared a record $5 billion final dividend and a $1.5 billion special dividend.
It’s fair to say that Tempus did not see the iron ore rally coming when it recommended taking profits in Rio shares late last July, when iron ore was about $110 a tonne and Rio’s shares had already recovered beyond pre-pandemic levels to trade at £47.98. Nor did a lot of people: consensus iron ore forecasts at the time were about $85 a tonne for the second half of the year. In fact, prices carried on rising and have traded at more than double that level, sending Rio’s share price as high as £64.80 last month.
Prices have retreated slightly on concerns about environmental restrictions in China in recent weeks, but are still in excess of $160 a tonne. Rio’s shares have also retreated somewhat, in large part due to going ex-dividend, but were still up another 1.4 per cent at £54.22 yesterday.
While the experience of the past eight months highlights the challenges inherent in commodity price forecasting, it should, nevertheless, be noted that most analysts have now raised their outlook for this year; RBC, for example, is now forecasting $141 a tonne. If such forecasts are correct, Rio should be well placed to keep churning out dividends in the
short term.
Still, Tempus stands by its assessment of other matters that should concern investors. Although the Juukan Gorge debacle has not had a big financial impact on Rio thus far —though tougher restrictions in Australia could affect it in future — the incident, and Rio’s poor handling of the aftermath, clearly spoke to worrying failures of corporate governance. However, with the old management now gone, new boss Jakob Stausholm striking the right tone, and the chairman to leave, there are welcome signs that the company finally recognises the extent of the problems.
Tempus also flagged the risks around growth projects, then epitomised by the Oyu Tolgoi copper project in Mongolia, plagued by rising costs and delays. Such projects are crucial for Rio to diversify in the longer term into commodities better aligned with the energy transition. In Mongolia, difficulties continue, while another big proposed copper project in the US, Resolution, also faces challenges amid objections from Native American groups.
Meanwhile in iron ore, an even riskier project is rapidly rising up the agenda: the huge Simandou deposit in Guinea, the troubled history of which gave rise to one of two ongoing legal investigations that hang over Rio.
Simandou’s risks are manifold, from environmental and governance issues to the execution of such a huge and costly project, and the possibility that its vast production could ultimately suppress iron ore prices. Stausholm, who has declared Rio of late “a bit too risk-averse”, appears enthusiastic.
Risks are rising for Rio, though with iron ore prices where they are, so too have near-term rewards. The new management team deserves a chance to make its case.
ADVICE Hold
WHY Iron ore prices support Rio’s dividend prospects but risky growth projects remain a worry
Halma
Such is the loyalty and knowledge of investors in Halma and its emergency sensors for industrial uses, that when the pandemic hit a year ago, they barely raised the alarm at the £8.7 billion FTSE 100 company (Robert Lea writes).
Tempus has been among those fans. One of this column’s five to follow tips for 2020 when the world did not know what Covid-19 was, Halma shares ended the year as best in class. They were up 15 per cent not counting the ever-present dividend, up 5 per cent last time to 16.5p, when everyone else was cutting theirs.
Halma’s kit helps to detect fires in buildings, gas leaks in industrial environments and pipe leaks for the likes of Thames Water. The applications and needs for its product do not go away much in a pandemic and while the crash more than halved the stock price of many leading companies, Halma’s dropped by 15 per cent at worst.
By last May Halma was back hitting the all-time highs it had reached before the pandemic. Since then the shares have been moving sideways, a mix of awareness that there was a touch of irrational exuberance, and latterly by the shift in capital away from safe havens and back into stocks with more risk.
Yesterday it reported that for the year to the end of March it expects profits to come in at about £267 million, the same as the previous year. It had previously guided that it expected to fall short by about 5 per cent. Its outlook message is that things are better but that this pandemic isn’t done yet.
Halma shares closed yesterday at £23.74, putting the stock on a multiple of 41 times this year’s earnings and a full 35 times on projected 2022-23 earnings.
The dividend is a standing dish but, with the stock at these levels, it is yielding less than 1 per cent. If you are a holder of Halma there appears no reason to abandon them. Potential buyers will conclude there’s plenty more value elsewhere.
ADVICE Hold
WHY A stock we like but one that is fully valued
